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Forget October spooks, Dow 18K coming: Lee

The Dow Jones Industrial Average and S&P 500 should increase 5 percent each from current levels by the end of the year, despite traditional October jitters and concerns about when the Federal Reserve might start hiking interest rates, longtime stock market bull Thomas Lee told CNBC on Tuesday.

Such a move would put the Dow over 18,000 and the S&P around 2,100 to finish out 2014. During the same period last year, stocks climbed 10 percent, said Lee, who opened a new firm, FundStrat Global Advisors, last week. "We've got, I think, a much stronger economic outlook today. And I think a similar level of underinvestment."

While a Dow 18,000 prediction puts Lee in the camp with other bulls like Wharton Professor Jeremy Siegel, other high-profile market watchers are expressing concern. Hedge fund pioneer Julian Robertson said this week that he sees bubbles brewing in stocks and bonds.

Stocks were under pressure Tuesday, continuing Monday's triple-digit Dow slide, as the U.S. and several Arab allies launched airstrikes on Islamic State strongholds in Syria. "In some ways, it may be a welcome sign because we're actually doing something about a growing threat to the U.S.," Lee said on "Squawk Box."

"In the past week, it's possibly more that we're entering the month of October, which is a month that scares people," he added. "I think it's been a bit of profit-taking over the last week. I don't think it is really the sign of the start of a 10 percent correction."

"The reason people get scared is a quarter of all crashes do happen in October. But I think we've got a lot ... favoring stocks in the fourth quarter," he continued. "A lot of fund managers are behind. This is the worst year for fund manager performance since 1997."

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Lee, formerly the chief U.S. equity strategist at JPMorgan, said investors are "overly worried" about a Fed rate hike. "Until we actually get a hike, the markets generally do pretty well."

"Twelve months out I think we're still in a bull market," he continued. "Next year is a time to really be looking for some sort of pullback. But it's going to be around the time we see actually see tightening take place, not in anticipation of tightening."

While many market watchers see the summer as a possible start for Fed rate hikes, Lee said he's hearing it might be earlier. "A lot of the conversations I've had is the market is focused on Fed rate hikes in the spring."

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Recent market declines could be a positive in the long run, he argued. "Everyone is getting cautious and nervous. That's usually a good sign. The market climb a wall of worry. Earnings are accelerating. The yield curve is telling us the expansion is still in very good shape."

"We're mid-cycle of this bull market. We still have years ahead of us," Lee said.

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