• It’s time for a correction in the stock market, according to Wells Fargo investment strategist Chris Harvey.
• Harvey said the US consumer is about to tap out and the Federal Reserve won’t be cutting interest rates anytime soon.
• “The VIX is at 13, everyone’s really happy, and it’s time for either a correction or some sort of pullback as we enter the new year,” Harvey said. 

The stock market is due for a correction as the end of the year approaches, according to Wells Fargo investment strategist Chris Harvey.

Harvey told CNBC on Thursday that a near-tapped out consumer and overly optimistic projections about interest rate cuts from the Federal Reserve means now is not the time for investors to be chasing risk.

Yet that’s just what they have done over the past month, with the S&P 500 jumping 8.9% in November, representing its 18th biggest monthly gain since 1950. Stocks continued their gains on Friday, with the the major indexes advancing by about 0.5%.

Harvey said the VIX, also known as the stock market’s fear gauge, is hovering at the historically low level of 13. That’s a sign that investors might be getting too complacent at a time when they should be worrying about an economic slowdown.

“The VIX is at 13, everyone’s really happy, and it’s time for either a correction or some sort of pullback as we enter the new year,” Harvey said. “We’re dramatically overbought. VIX [at] 13 tells you: you know exactly the path you’re going to go down, nothing’s going to surprise you, and that market has a funny way of doing that.”

Harvey questioned how a bull market could continue its run from here given that consumers are showing signs of weakening, equity valuations are high, and the Fed could leave interest rates higher for longer well into 2024.

“The consumer’s close to being tapped out, [valuation] multiples are 20x, people are thinking the Fed is going to cut, but I don’t think the Fed’s going to cut until the second half of the year, so where is that bull market coming from?” Harvey said. 

Bullish investors would argue that heading into 2024, the economy could continue to avert a recession as the Fed cuts interest rates not because the economy is suffering, but because inflation has moderated. In other words, the Fed could cut interest rates because they can, not because they have to. Harvey isn’t buying it.

“I’ve never seen that. They always cut because they have to,” Harvey said, adding that stock market gains are going to amount to “a whole lot of nothing” next year.

Harvey recommends investors position their portfolio to be defensive heading into next year, that way they can take advantage of any potential volatility spikes and stock market declines.

Harvey has a 2024 S&P 500 price target of 4,625, representing potential upside of less than 1% from current levels.