Chris Harvey, head of equity strategy for Wells Fargo & Co. (NYSE: NYSE:WFC), appeared on CNBC’s "Fast Money" to discuss the current market environment, the Federal Reserve and what he expects to happen next.
What Happened: Earnings don’t make or break the market, Harvey says. If they're positive, they'll initiate a trading rally.
“This is because markets do not find a bottom until something breaks in the capital markets and the Fed pivots or earnings come down by 10%,” he said.
Harvey cites currency collapse and further tensions in Ukraine as factors that could lead to something in the market breaking. Although fundamentals are holding up, the cost of capital keeps on increasing which will eventually lead to revisions.
“If you were ever going to use a transitory word, you would right now,” he said. Prices saw large inclines a year ago while demand continued to surge, which is the opposite of what's happening today as consumers become more selective. See video below:
Regarding inflation, the Federal Reserve and investors see different pictures, Harvey says. The Fed feels the need to get inflation down to bring its credibility back, while investors see the underlying fundamentals of a financial markets rollover.
The smoothing out of supply chain kinks is helping to ease inflation, he added.
Also Read: These 2 Small Energy Stocks Sport 10% Yields — And Maybe More — As OPEC+ Slashes Oil Quotas
Why It Matters: Harvey predicts that inflation will come down, but due to the rising cost of capital, stock prices are being pushed down.
We are now at a point where fundamentals have to roll over, he added.
The market does not necessarily have to fall another 10% to 15%, but until the Fed pivots, stock prices will continue to decline, Harvey explained.
“I think we are going into a recession, I think numbers have to go down, until that occurs we will not wash things out," he said.
How To Trade The Rally: Harvey's 2022 target range for the S&P 500 falls between 3,300 and 3,900, as the rally could have further upside.
Harvey mentioned that investors can earn money renting or trading the momentum trade such as the energy trade, since the SPDR Energy Select Sector ETF (ARCA: XLE (NYSE:XLE)) is up roughly 46% year-to-date.
Investors should avoid deeper value traders and “bottom fishing” or taking the “contrarian approach”, rather have a simple approach, “chart looks good or the chart looks bad,” said Harvey.
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