Recession fears are overblown, and stocks will break out to new highs next year: Federated

Wall Street angst over a possible recession may be increasing, but one bull refuses to waver.

Federated Investors' Steve Chiavarone believes there's nothing on the horizon that suggests the 2018 market corrections will become a massive downturn next year.

Rather, he sees stocks hitting fresh record highs — citing labor market trends, inflation levels, the Treasury yield curve and credit spreads as key factors contributing to a favorable economic and market environment.

"We don't have any of the early signs of recession. Yet, we have a market where despite 20 percent earnings growth, the P/Es [price-earnings ratios] have fallen 20 percent," the fund manager said on CNBC's "Trading Nation" on Friday. "What that tells us is the market is pricing in recession in 2019. We just don't think that is going to happen."

Yet, it appears the Street isn't convinced.

The major indexes ended the week deep in the red, with the Dow plummeting almost 500 points on Friday mainly due to global growth jitters. It's now off 2.5 percent so far this year.

The S&P 500, which closed at its lowest level since April, is off more than 12 percent from its all-time high of 2940 hit on September 21 and 2.75 percent for 2018.

Fed to ease volatility?

However, relief may be in sight. Chiavarone suggested next week's Federal Reserve's policy meeting could help calm the Street and act as a catalyst for a year-end rally — particularly if Chairman Jerome Powell confirms he's moderating his stance on tightening interest rates.

"We need to get a little bit of clarity on that. If it turns out that it's just the December hike, and then we're in pause... I think that'll provide some comfort to the market," said Chiavarone.

Plus, he said any solid news on resolving the U.S.-China trade war could also help propel stocks higher. "You're going to have volatility in the market until we have more clarity on trade," he added.

Chiavarone's firm has a 2019 S&P 500 year-end price target of 3100, a number that was originally expected this year. Federated downgraded this year's target to 2800, following the deep sell-offs gripping the market since October.

"We've broken below some key technical supports," the fund manager said, saying the firm's holdings were heavily tilted toward stocks. "We were 11 percent overweight equities in the summer. We're closer to 3 or 4 percent overweight equities now in recognition of that."

But he viewed the downturn as a temporary situation.

"Our best analysis —as we look at markets and as we look at the economy — is that things are stable," Chiavarone said. "We're confident where markets are going to go over the next 12 months."

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's Closing Bell (M-F, 3PM-5PM ET). In addition, he contributes to CNBC and CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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