The bond market has influence on the Fed, says Wells Fargo's Chris Harvey

Is there less reason to be bullish this market? Let's ask Chris Harvey. He is head of equity strategy at Wells Fargo Securities back at PostNite. It's good to see you. Good to see you, too. How would you answer that question? Less reason to be bullish? No, I think in the short term, you're a little less bullish. The Fed didn't quite cancel Christmas, but they did cancel the Santa rally. But if you look at it, you still have the same things in place. You have a stronger economy, you have good fundamentals. The Fed is going to ease next year, M&A activity is going to start to come up, and we're having a looser regulatory environment. So, it's all still there, it's just in the short term you have a little bit of volatility and that happens. All right, let's take this piece by piece, because the Santa Claus rally is technically supposed to start tomorrow, go into the first few days of the year. You're suggesting you don't think we're going to get it? No, I think our price target is still a little bit higher than 5,800. We're slightly above that. I think that's about right. 5,800. 5,800, yeah, 5,800. I'm sorry. No, no, no, that's fine. You said 5,800. I'm just making sure I heard you right. Yep. And so, why would you rally the market right here, right now? One of the things that you actually have is you have refundings, or you have auctions that are pushing up yields. That's going to weigh on equities. You had the Fed say what they said, and a lot of hedge funds have gone home for the holidays. So, there's not much reason to get excited. That's fine for next year, because next year maybe we start with a pretty good pop out of the gate. Do you think the Fed's a big risk next year? I don't think it's a big risk. I think it surprised a lot of equity people. I think people were a little bit too aggressive, a little bit too bullish. But I think the Fed will continue to cut rates at a moderate pace. They're going to normalize rates, which is what they're saying, and that's fine. As long as we have the Fed easing, which they said they're going to do, I think that's a good thing. Right? Because, again, the backdrop is pretty supportive. The macro is pretty supportive. You have economy that's stronger than expected. You have fundamentals that are still improving. Valuation is high, but you're paying for growth and you're getting double-digit, or we think you're going to get double-digit growth next year. It's funny. The bond market essentially pulled the Fed to it. The stock market may have been a little over its skis. The bond market wasn't, because interest rates had moved up substantially from the cut in September to now. Scott, that's a great point, right? Because this is not our first rodeo. One of the things we keep saying to ourselves is, what is the Fed watching? It does appear to be that the Fed is watching the market, then the market does influence the Fed, because we had a 50 basis point cut back in September. What's the difference between now and then? Well, where were two years at that point in time? They were 150 basis points lower than where Fed funds were. Where are Fed funds in two years? They're almost on top of each other at this point in time. So I think the Fed really does pay attention to the market, or the bond market per se, and that does have a pretty good influence on it. I mean, I remember when I was sitting at Jeffrey Gundlach's office doing that Fed meeting in September, live in L.A., and they do the super cut, and rates go up. And it was like, oh, that's that's an interesting move, maybe something to keep an eye on. And here we are where we are now. People are making a whole bunch of predictions for the new year. You know, there were some out today from Apollo's Torsten Sloch, who says of this conversation we're having, 40 percent chance inflation picks up, 40 percent chance the Fed raises rates, 40 percent chance the 10-year goes above five. Let's just say, let's say we don't think we're going to hike, OK? But if the 10-year goes to or above five, we've got a problem in the stock market. We will have a problem for a short period of time, right? So it depends on how it gets there. If it's a short move higher, similar to what we had in the summer of 23, then the market will trade off. But then I think it'll get back on its horse and move higher. If if he's right and I don't think he's right, if inflation does go sustainably higher, then yes, we have a little bit of a problem. If that helps earnings, OK, some of the stocks will do better. Some of the stocks will do worse. One of the things that you're seeing over the last couple of weeks is you're more levered companies are really having a difficult time. You're smaller cap names, you're more levered companies. And those are the ones that aren't bouncing today. Your growth names are bouncing, your higher risk names. And those are the ones that I think will perform better in that kind of environment.