Chris Harvey’s reign as the biggest bull of the year will not extend into next year.
Wells Fargo Securities head of equities strategy, whose 2021 S&P 500 target is 4,825, predicts that Wall Street will hold a lively rally by the end of the year and then see a losing 2022.
“You want to bring stocks to a level that they can not maintain. We want the stock market to melt up,” he told CNBC’s “Trading Nation” on Friday. “We want to bring stocks to a level where the fundamentals and valuations do not support them.”
The S&P 500, Nasdaq and Dow ended the week on record territory. S&P and Nasdaq rose 7% in October, while the Dow rose 6%.
“What we see from many individuals and investors is that they feel the market is unbreakable at this point. We have had several withdrawals. You have bent it, but you have never broken,” Harvey said. “It brings a different level of FOMO [fear of missing out], and it gives a level of confidence. “
Harvey lists strong financial fundamentals, better-than-expected earnings, low capital costs and massive cash on the sidelines as fuel for gains.
“It’s late in the bull market,” he said. “Now is a period where irrationality is becoming much more rational. Things you do not expect to happen can happen, and will most likely happen.”
Harvey argues that names of momentum, which include banks, will be important drivers by the end of the year. He calls the economy a “stealth leadership game” that will benefit from the Federal Reserve’s downsizing plans.
Do not go bottom fishing
“It will put upward pressure on interest rates, and that’s good for the banks,” Harvey said. “We want to buy things that work. We do not want bottom fishing. We do not want to buy broken stories.”
He proposes playing the iShares MSCI USA Momentum Factor ETF.
“The funny thing here is that a lot of people think it’s high-tech stocks and all tech stocks,” he noted. “If you look at the momentum index and the Momentum ETF, 20% of it is in banks, and three of the top ten names in the momentum ETF are banks. So you have a pretty good diversity.”
Harvey estimates that the market meltdown will last three to six months. In the second quarter of next year, he expects a more hawkish Fed, declining growth and uncertainty surrounding the midterm elections will begin to create headwinds that could cause a 10% correction.
“I hate this comment, but I’m going to give it to you anyway. I think it’s a ‘sell in May and go away,'” Harvey said. “When you get into late spring, early summer, you really want to be more defensive.”
It is still considered too early for companies to deliver next year’s S&P targets. Harvey’s goal is 4,715. The more bullish estimates so far include Credit Suisse’s Jonathan Golub, who has an S&P target of 5,000.