Face-ripping Rallies and Market Slumps is What Wells Fargo is Telling Clients to Prepare for This Summer

June 29, 2022 6:57 AM EDT
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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.

By Senad Karaahmetovic

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