When last we checked in on Wells Fargo’s Chris Harvey, he was riffing on Clint Eastwood classics and lamenting the fact that “Santa got mugged on the way to the rally”.
Or wait, actually that’s not true. That was the second to last time we checked in on Chris. The last time we checked in on Harvey, he was slashing his 2019 S&P target to 2665 all the way from 3079 based on what he called “a more comprehensive understanding of the Fed’s near-term philosophy and the belief that it will cause the growth deceleration to intensify.”
Essentially, Harvey argued that the Fed’s December hike and, perhaps as importantly, the way in which that hike was communicated, might well have cemented the self-fulfilling prophecy wherein, to paraphrase Chris, lower equities lead to wider credit spreads which entail higher costs of capital leading to diminished access to capital and thereby less investment and risk taking which will eventually lead to an economic slowdown “with the cycle repeating and feeding upon itself.”
That was late last month and while we’ve seen a couple of dramatic rallies (December 26 and Friday) since then, the generalized sense of angst among market participants is still palpable and it’s by no means clear that Powell’s reasonably successful effort to calm fears during remarks delivered in Atlanta is going to be enough to turn the ship around. That goes double if the December jobs report ends up being more “last gasp of a long-in-the-tooth expansion” and less “sign that the economy is in fact more resilient than the pessimists give it credit for.”
Well, Harvey is out with a brief new note that serves as a review of the year that was, but it kicks off with his “Top 10 List for 2019” and there are couple of notables.
Harvey says that Value and Bank stocks will ultimately start to perform well sometime in H1 (with Value only becoming truly attractive “after one more negative repricing”), but the more notable bits come courtesy of his take on the prospects for the Fed and the economy. These are all written as predictions, so that accounts for the forward-looking phrasing.
“The Fed does not placate equity investors in 1Q19 and in the first half of ’19 equity markets waver”, Harvey says, before warning that management teams are likely to start sounding the alarm in the form of weaker-than-expected guidance. “The C-suite takes a more conservative stance citing uncertainty, a lack of visibility and difficult comps when providing their 12-month ahead outlook”, he then cautions.
Harvey also notes that it is “not unusual for a new Fed chair” to run into problems and he thinks Powell be no exception. In essence, Harvey thinks ol’ Jay will probably find himself face to face with a “capital markets crisis.”
He goes on to suggest that “the market will become even more discriminating with the continued tightening of monetary policy [and] as a result, markets may differentiate first across risk and then across fundamentals.” “Certainty”, Harvey says, will “become an investment style”, as market participants avoid risk in favor of dividends, lower vol. strategies and quality.
Importantly, Harvey says the following about market psychology and sensitivity to trade concerns:
This year, Behavioral Finance and Supply Chain Management are the buzzwords. Market and investor psychology plays heavily into risk pricing. The full extent of the demand pull ahead related to tariff mitigation and the management of the supply chain becomes apparent.
That speaks to two of the themes we’ve been keen on emphasizing for months, namely that i) a key determinant of where things go from here will be the extent to which investors pull forward end-of-cycle trades amid rampant concerns about growth, thereby effectively shaping their own reality, and ii) the ramifications of Trump’s efforts to force companies to rethink and otherwise shake up their supply chains will suddenly dawn on management teams as it’s no longer possible to argue that “this too shall pass”, so to speak.
As ever, Harvey isn’t wholly pessimistic, but as is clear from the above, he generally agrees with the notion that risk aversion is likely to proliferate in the new year while corporate management teams will finally be forced to accept the reality of a more uncertain outlook amid the trade war and a generalized inability to get a clean read on where things are headed now that the fiscal impulse is waning without a concurrent resolution to the myriad issues weighing on sentiment.
Take all of that for what it’s worth.