This Content Is Only For Paid Member
Wells Fargo’s Chris Harvey cautions that the stock market may be overly optimistic about the Federal Reserve’s fiscal tightening coming to an end. Ahead of the central bank’s rate decision, Harvey, the head of US equity strategy at Wells Fargo Securities, anticipates Chairman Powell’s emphasis on a “higher for longer” approach but doubts that market sentiment will shift regarding upcoming rate cuts.
According to Harvey, US equities could experience a decline in the first half of 2024 due to fading corporate pricing power and historical patterns suggesting a rebound in volatility early next year. He joins other Wall Street strategists in expressing skepticism about the sustainability of the stock market’s recent resilience into the next year.
Despite the current subdued levels of the Cboe Volatility Index (VIX), signaling smooth sailing, Harvey warns of potentially choppier markets ahead. He notes that the low VIX level indicates a retrospective perspective, with the market not being easily scared or surprised. However, Harvey points out that historical data, particularly from 1998, suggests that a VIX below 14 at the start of the year could lead to increased volatility and equity drawdowns in the first half.
Even as inflation data aligns with expectations, Harvey observes an overconfidence in investor expectations for future interest rate cuts from the Fed. While the S&P 500 reaches a 21-month high, he urges caution, stating that the market has become too optimistic about Fed easing.
Harvey’s team recommends that investors maintain defensive positions, following their late November upgrade of the utilities and health-care sectors. He anticipates a more constructive market in the second half of 2024, eventually turning positive when the Fed initiates rate cuts.
