This time a year ago, the market had rallied strongly off the March lows. On March 19, just four short days before the final surge of selling and investor capitulation on March 23, Barry Bannister and his equity strategy team at Stifel dropped a prediction for a relief rally that would carry the S&P 500 to the 2,750 level by April 30. On March 23, the index finally cratered for good, hitting an intraday low of 2,191 and closing at 2,237.
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We covered the bold prediction then, and while some were very skeptical of the call, Bannister made the prerequisite financial media rounds at the time giving his firm’s rationale for the prediction. In early April of 2020, as a surge of alarming news on the COVID-19 pandemic flooded the airwaves, Bannister and the Stifel team came out again and defended the call, telling clients to stand their ground.
In the middle of April, as the rest of Wall Street was finally getting on board, the team raised the end-of-April target to 2,950. On April 30, in line with the call from Stifel, the S&P 500 closed at 2,912, after hitting an intraday high of 2,930 and after trading to 2,950 the day before. In late May of 2020, Stifel once again raised the price target on the S&P 500 to 3,250 by August 30.
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Much of Bannister’s incredible call has been lost in the sturm und drang of the past year, which included a very contentious election, a massive widening of the gulf between Americans, a tsunami of constant negative pandemic news and a shuttered economy. However, the S&P 500 now sits almost 700 points higher than in late August in one of the most incredible bull market runs in the history of Wall Street.
While there is every reason for the positive, forward-looking commentary emanating from Wall Street, especially after the stunning first-quarter results, the reality is the market is expensive and overbought, yields have gone higher, and inflation, despite the “transitory” commentary from the Federal Reserve, is making itself felt in a big way. Just ask motorists, grocery shoppers or homebuilders. With all those metrics and many more, Bannister sees the potential for a 5% to 10% move down over the next six months.
Using the same tools that helped to predict the massive rally after the market sold off almost 35% in a month last year, Bannister combines a little “sell in May and go away” with a host of additional data and metrics.
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Bannister said this in a research report that noted the potential for the market to drift lower for the next six months:
We see the S&P 500 flat-to-down 5-10% May 1 to Oct-31, 2021; seasonality is especially useful at this point. The unusual math of seasonality the past year predicted within a couple percent the strong COVID-19 rally Mar-Apr, 2020 and the 28% price gain Nov-2020 through Apr-2021. If May through Oct-2021 is seasonally weak, we note that S&P 500 Defensives (Staples, Healthcare, Utilities, Telecom Services) do typically out-perform Cyclicals (note Cyclicals include Technology) in the same period, albeit usually with falling yields. S&P 500 seasonal strength the six months since Nov-1, 2020 also appears to have front-loaded returns, diminishing May-Oct 2021.
If we are wrong, the only bubble path we see is a much higher P/E ratio based on yield repression, but responding to those who see post-COVID-19 as a “Roaring 1920s” meme we show the market P/E has already reached the Oct-1928 trend-adjusted level, which was only 12 months before the Oct-1929 Crash. All bubbles pop, and the risk is that if the Fed is financing Biden Administration spending and must later rescue stocks (because retail sales are correlated with the S&P 500), then Fed independence may be lost for a generation (benefiting Value versus Growth after the wreckage).
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Note that Bannister is not calling for a major market crash, and with good reason. The reopening of the economy, combined with a massive trove of cash in banks deposited by stimulus-fed consumers has to go somewhere. Current data suggest it indeed will, especially over the coming summer months. In addition, despite the inflationary pressure that is building, the Federal Reserve will hold off on raising rates as long as possible, with some predicting fed funds will not move higher until 2023.
However, a taper tantrum like 2013 could emerge when the Fed slows and eventually ends the buying of government debt and mortgages. This process of quantitative easing is designed to keep interest rates low by keeping a bid under the debt.
The April jobs data is due on Friday, and the consensus across Wall Street is a whopping 965,000 will be added. Jefferies has forecast a massive 2.1 million new jobs. This kind of data will help cushion the coming flat-to-down scenario that Bannister is predicting, but the seasonality mentioned in the report, combined with a rotation to value from growth, means that some of the stocks that saw meteoric moves higher over the past year may be set to back up big.
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We at 24/7 Wall St. have covered Bannister and his team for years, and one thing is for sure. While his incredible Elaine Garzarelli moment was never fully appreciated, the years of quality work and prescient calls he has made speak for themselves. Plus, it makes sense for investors to take profits now and start building some cash reserves.
In addition, it is important to note that capital gains tax increases are a given, at least at many income levels. So, while it is an old adage, “sell in May and go away” may be the perfect way to proceed now.
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