Market is melting up to new records, but 2022 looks rough: Wells Fargo

Chris Harvey’s reign because the yr’s largest bull will not lengthen into subsequent yr.

The Wells Fargo Securities head of fairness technique, whose 2021 S&P 500 goal is 4,825, predicts Wall Road will stage a vibrant year-end rally after which see a dropping 2022.

“You are going to carry equities to a stage that they can not maintain. We’ll have the fairness market melt-up,” he advised CNBC’s “Trading Nation” on Friday. “We’ll carry shares to a stage the place the basics and valuations do not assist them.”

The S&P 500, Nasdaq and Dow ended the week in record territory. The S&P and Nasdaq have been up 7% in October whereas the Dow gained 6%.

“What we’re seeing from a variety of people and buyers is that they really feel just like the market is unbreakable at this time limit. We have had a number of pullbacks. You’ve got bent it, however you’ve got by no means damaged,” mentioned Harvey. “That brings one other stage of FOMO [fear of missing out], and that brings in a stage of confidence.”

Harvey lists robust financial fundamentals, better-than-expected earnings, low capital prices and large money on the sidelines as gas for positive aspects.

It’s late in the bull market,” he mentioned. “Now could be a interval the place irrationality turns into way more rational. Issues you do not count on to occur can occur, and probably will.”

Harvey contends momentum names, which embody banks, might be main drivers into year-end. He calls financials a “stealth management play” that may get traction from the Federal Reserve’s taper plans.

Do not go backside fishing

“That may put upward strain on charges, and that is good for banks,” mentioned Harvey. “We need to purchase issues which can be working. We do not need to go backside fishing. We do not need to purchase damaged tales.”

He suggests enjoying the iShares MSCI USA Momentum Factor ETF.

“The humorous factor right here is lots of people imagine these are excessive tech and all tech-type shares,” he famous. “For those who have a look at the momentum index and the Momentum ETF, 20% of it’s in banks and three of the highest ten names within the momentum ETF are banks. So, you might have fairly good variety.”

Harvey estimates the market melt-up will final three to 6 months. In subsequent yr’s second quarter, he expects a extra hawkish Fed, decelerating development and uncertainty surrounding the mid-term elections to start out creating headwinds that would trigger a ten% correction.

“I hate this remark, however I’ll give it to you anyway. I believe it’s a ‘promote in Could and go away,'” mentioned Harvey. “By the point you get into late spring, early summer season, you actually need to flip extra defensive.”

It is nonetheless thought-about early for companies to ship subsequent yr’s S&P targets. Harvey’s goal is 4,715. The extra bullish estimates to date embody Credit score Suisse’s Jonathan Golub, who has a 5,000 S&P target.


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