/Next stock market crash: Strategist sees risk of December correction – Business Insider

Next stock market crash: Strategist sees risk of December correction – Business Insider

  • The stock market risks a correction in December if progress on a trade deal fails to materialize, according to Barry Bannister, the head of institutional equity strategy at Stifel. 
  • In a recent client note, he explained why he thinks much of the progress on a so-called Phase 1 deal has already been priced in.
  • Last November, Bannister forewarned investors about the sell-off that hit the market a month later.  
  • Click here for more BI Prime stories

Nearly all the closely followed chief equity strategists on Wall Street who have released their 2020 forecasts expect stocks to continue rallying.

But not everyone sees a smooth ride on the way to higher prices, including Barry Bannister, the head of institutional equity strategy at Stifel. In a recent client note and TV interview, he said he sees risk of a late-2019 correction, which is technically defined as a drawdown of 10% or more in the S&P 500.  

Bannister issued a similar warning about a year ago. His concern was that the Federal Reserve had raised interest rates too quickly and beyond a point that could accommodate a continued rally in stocks. 

The market eventually succumbed, and the S&P 500 bottomed on Christmas Eve about 18% from the high it had reached in September.   

This time around, Bannister’s concern has little to do with the Fed. In fact, he says the Fed is supporting the market this year by injecting liquidity into the financial system through its repurchase agreements. And, the central bank has cut interest rates three times this year, rolling back all but one of the hikes it implemented in 2018. 

Bannister’s worry into year-end is progress on trade. 

“The Fed has done its part,” Bannister said in an interview on Bloomberg TV. “But what we really need to see now is a trade deal. Any backtracking on trade? Negative.” 

Bannister is far from the only strategist who sees the yearlong trade war between China and the US as a stumbling block for equities. But after a 26% rally in the S&P 500 year-to-date, he says investors may have already priced in much of the progress on the so-called Phase 1 deal.

He specifically flagged his model, which shows that the S&P 500 has run above the level implied by a rebound in US manufacturing, as measured by the purchasing managers’ index. 

The mismatch his model is showing is illustrated in the chart on the left: 

Screen Shot 2019 11 29 at 10.41.42 AM


Additionally, the yield curve, or gap between short- and long-term US Treasury yields, has already flashed its reliable recession signal. It’s an indication to Bannister that both the US and China need a trade deal in order to avert an economic downturn that would hurt stocks. 

If indeed the market has already priced in much of the trade progress, any news of deceleration could set it back, even as details about how core issues would be resolved remain scarce.

Despite Bannister’s call for a potential market correction in December, he remains bullish on the stock market into 2020. He sees a 5% return for the S&P 500 in 2020, but twice that — or 10% — for a pair trade that bets on cyclical industries and bets against defensive industries. 

His examples of the former include energy, industrials, materials, and technology, while real estate, utilities, telecoms and staples make up the latter category.

Original Source