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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 Avenue will stage a vibrant year-end rally after which see a shedding 2022.

“You are going to deliver equities to a degree that they can not maintain. We’ll have the fairness market melt-up,” he instructed CNBC’s “Trading Nation” on Friday. “We’ll deliver shares to a degree the place the basics and valuations do not help 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 lots 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 degree of FOMO [fear of missing out], and that brings in a degree of confidence.”

Harvey lists sturdy financial fundamentals, better-than-expected earnings, low capital prices and big money on the sidelines as gas for good points.

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

Harvey contends momentum names, which embrace 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 can put upward stress on charges, and that is good for banks,” mentioned Harvey. “We need to purchase issues which might be working. We do not need to go backside fishing. We do not need to purchase damaged tales.”

He suggests taking part in 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 take 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’ve 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 begin creating headwinds that would trigger a ten% correction.

“I hate this remark, however I will give it to you anyway. I believe it’s a ‘promote in Might 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 of early for companies to ship subsequent yr’s S&P targets. Harvey’s goal is 4,715. The extra bullish estimates thus far embrace Credit score Suisse’s Jonathan Golub, who has a 5,000 S&P target.

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