The stock market will 'zig-zag' 5% higher toward new record levels in December, Fundstrat says

• The stock market is poised to jump 5% in December to test record highs, according to Fundstrat's Tom Lee.
• But it won't be a straight line higher, and the upcoming jobs and inflation reports could spark a temporary sell-off.
• Lee said investors should buy any potential dip in stocks as the second half of December should be filled with gains.

The stock market is poised to "zig-zag" towards record highs in December, with the S&P 500 rising 5% to 4,800, according to a Monday note from Fundstrat's Tom Lee.

Such a gain would put the S&P 500 within spitting distance of its January 2022 all-time intraday high of 4,818, and just above its record closing high of 4,796.

October personal consumption expenditures price data, set to be released on Thursday, should be "soft" and help drive stocks initially higher, according to Lee.

But he doesn't expect the stock market's potential gains over the next month to happen in a straight line, and said there could be downside volatility driven by upcoming jobs and consumer inflation data.

If those two reports, scheduled to be released on December 8 and December 12, come in higher than consensus estimates, they would likely send bond yields up and stock prices down as it would put investors on edge about the potential for further rate hikes by the Federal Reserve.

"The reason for the 'zig-zag' is that we know rates markets is still hyperreactive to the opposing forces of 'falling goods and housing inflation' against resilient labor markets," Lee said.

A strong jobs report could be in the cards because tens of thousands of auto workers were rehired in November following the end of strikes against General Motors, Ford, and Stellantis. 

But any stock market declines on the November jobs and inflation reports will likely be short-lived and Lee recommends investors buy the dip. That's because incoming data continues to support a soft-landing scenario for the economy, even as investors continue to be laser-focused on a potential recession.

"We are buying dips if the markets see selling pressure," Lee said, noting that solid Black Friday sales are a positive sign because it shows continued resilience in the consumer.

The major catalyst for a continued move higher in stock prices next month is likely to come on December 13, when the Fed holds its FOMC meeting and press conference, according to Lee. Fed Chairman Jerome Powell is expected to leave interest rates unchanged, and Lee said he sees room for a "dovish shift" among the Fed members.

Finally, he highlighted that despite the S&P 500 surging 20% so far this year, investors have pulled $240 billion from equity mutual funds and ETFs. That money could serve as buying power for investors who missed out on this year's rally and decide to chase equities higher.