Face-ripping Rallies and Market Slumps: Wells Fargo Cautions for This Summer
2022.06.29 16:36
Face-ripping Rallies and Market Slumps is What Wells Fargo is Telling Clients to Prepare for This Summer
By Senad Karaahmetovic
Wells Fargo senior equity analyst Christopher Harvey, one of the closely-watched strategists on Wall Street, sees two near-term positive catalysts that could send the stock market higher.
First, the June CPI print in mid-July could come in below market expectation. Secondly, Russia and Ukraine may ultimately meet at the bargaining table. Furthermore, a “much-anticipated market ‘washout’ could catalyze a more sustained move higher.”
Still, Harvey tells clients that it is unlikely the market could rally “until it believes the Fed will toggle from a 50-75bp tightening to a more mundane 25bp increase.”
“We believe a downshift in Fed hawkishness will be viewed as a positive by market players. For those that say an equity market bottom cannot be put in until we know the top on interest rates, such a move would provide clarity. If the next three moves are 75, 50, and 25bps, Fed Funds would be 3.00% to 3.25% — or very close to the current 2yr yield. The past two tightening cycles have ended when Fed Funds and the 2yr were at very similar yields,” Harvey told clients in a note.
On the other hand, stocks could extend the slump in case Q2 earnings outlooks “get squishy” and if the 2-year UST yields spike above 3.5%.
All in all, investors should prepare for a rough summer.
“We expect significant volatility this summer, with ‘face-ripping’ short-covering rallies followed by economically-inspired market slumps,” Harvey concluded.
