EDITOR NOTE: Is the stock market about to get decimated by yet another major plunge? According to Wells Fargo, it’s highly likely. Election risks and a new surge in US COVID cases make for a potential powder keg--and remember, the market has a tendency to react first, asking questions only when the dust has settled. A short-term “correction,” Wells Fargo calls it, we don’t know the duration these two factors may claim--whether weeks or months, extending well into the next year. As they unfold, we do know that the money investors will be putting back into the markets will be losing value at a slightly accelerated rate. And it will continue that way as the Fed pursues its goal of an “average” 2% inflation, raising the cost of living for all Americans, devaluing the dollar, and depreciating the wealth behind the equity assets they’re pumping up.
The man in charge of building investment strategy for Wells Fargo Securities won’t put new money to work in stocks right now.
Christopher Harvey believes the market is too vulnerable to another correction and a 50% surge in volatility.
He lists two troublesome forces for his decision: A potentially contested presidential election and the latest uptick in coronavirus cases in the U.S. weighing on stocks a bit longer.
“The market has a tendency to shoot first and ask questions later when it comes to Covid,” the firm’s head of equity strategy told CNBC’s “Trading Nation” on Friday.
Excluding risks associated with the election, Harvey estimates in a recent research note the newest coronavirus headlines alone imply a 2% to 4% downside from current levels.
He highlights the danger in a chart of new U.S. virus cases.
It shows the 7-day trend line of new infections has flattened following this month’s rise in cases. But Harvey warns it could still “break either way.”
He also isn’t willing to put new money to work until there’s more clarity on the election outcome. His hope is the first debate between President Donald Trump and Joe Biden on Tuesday moves the needle.
“If the debate tightens the race, one of the things that we worry about is the probability of a contested election,” said Harvey. “In a contested election, we can see 10% downside to the equity market.”
He may be near-term bearish, but Harvey isn’t letting it affect his optimistic 2021 forecast. He’s longer-term bullish on stocks regardless of who wins the election.
“We’re longer-term positive because we do think there’s a Covid solution that hits the marketplace,” he added. “The first half [earnings] comps are very easy, and we do think the economy slowly grinds higher.”
And, he plans to add exposure to S&P 500 groups, particularly industrials, that would be winners in a pandemic-free world.
“Surprisingly, we want to add Covid beta to the portfolio. When we talk about Covid beta that means stocks that do well as Covid becomes more manageable as we get solutions in the marketplace,” he said. “What you need to see is just a gradual improvement, and because the situation has been so dire for so long, we could see a tremendous amount of upside.”
But for now, Harvey is sticking with his S&P 500 year-end target of 3,388, which reflects about a 6% drop from the index’s all-time high hit on Sept. 2.
“I think we put in the highs [for the year]” Harvey said.
Originally posted on CNBC