Equity investors should be ready for a 10% correction in the fourth quarter, according to Stifel’s Bannister

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Investors shouldn’t be surprised by a 10% market correction in the fourth quarter, although a bear market could still take years, according to a leading Wall Street analyst.

The outperformance of equally weighted cyclical stocks versus defensive stocks is approaching a level at which the price / earnings ratio has driven the S&P 500 SPX,
+ 0.30%
corrections are occurring, which could cause the S&P 500 to drop to around 4,000, wrote Barry Bannister, chief equity strategist at Stifel, in a note on Thursday (see chart below).

Stifel


This is a moderation of Bannister’s previous call for a pullback to 3,800. The S&P 500 rose 0.3% on Thursday to close at 4,549.78, its first record close since September 2. the Dow Jones Industrial Average DJIA,
-0.02%
finished lower than 0.1% to 35,603.08, leaving it within 0.06% of its August 16 closing high.

Bannister said the target is based on concerns about slowing global liquidity and tighter financial conditions as the Federal Reserve prepares to reduce its monthly asset purchases. The danger could increase once the Biden administration announces its decision to re-elect Jerome Powell as Fed chairman.

The Fed would “normally” be about 2% tighter, meaning short rates of around 2%, at that level at current inflation and employment levels, he wrote, “but their delay strategy has inflated assets.

“Even with a decrease, QE4 is peaking at 5,200 +/- for the S&P 500 by mid-2022, a move that indicates growth stocks could regain their lead after the correction,” he said. writing.

Stifel analysts don’t see a real bear market – generally defined as a pullback of 20% or more from a recent peak – until the fed funds rate, now between 0% and 0, 25%, rises to 1%, Bannister said. It would take four quarter-point rate hikes, which federal funds futures indicate won’t happen until 2024, he noted.


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