One Wall Street firm says a bear market will rock stocks in the next year - but it knows how you can guard against the turmoil
- US stocks are fresh off a brutal day of selling that saw the Dow Jones industrial average plummet more than 700 points.
- One Wall Street analyst says the weakness is just getting started, and forecasts a bear market within the next year.
- He provides a handful of defensive stock positioning recommendations to help investors get ahead of what he views as an impending meltdown.
Thursday's bloodbath in US stocks may just be the beginning of troubling times ahead, at least according to one Wall Street firm.
Barry Bannister, an equity strategist at Stifel, has seen enough and is calling for a bear market in US equities sometime in the next year. (Note that a bear market is defined as a 20% decline from recent highs.)
His rationale for the bearish outlook - that the removal of Federal Reserve accommodation will hurt corporate profits and whip up volatility - is not particularly novel, given that it's a commonly-cited fear for investors. What's notable about it is the severity of his forecast.
By Bannister's measure, even a gradual removal of easy monetary conditions may cause stocks to "adjust rapidly with a 16% price-to-earnings (P/E) decline." That would be a disastrous adjustment for a market already viewed as overvalued - and one for which corporate earnings are such an important pillar.
But Bannister's bearish view doesn't end with his call for a 20% drop. He sees the stock market's tough times extending over a full decade, predicting a 0% total return from 2017 through 2027.
We "predict an abysmal outlook for the S&P 500 return from 2018-2027E and a bear market that probably starts within a year," Bannister wrote in a recent client note.
So what's an investor to do, assuming Bannister's skepticism comes to fruition? He says it's time for traders to cycle into defensive positions that typically rise during times of turmoil, and are therefore effective hedges.
He highlights 20 areas to consider, including: electrical utilities, multi-utilities, REITs, tobacco, household products, beverages, diversified consumer services, biotech, professional services, food products, airlines, leisure products, healthcare technology, pharmaceuticals, food and staples retail, independent energy producers, healthcare equipment and supplies, diversified telecom services, life science tools and services, and internet and catalog retail.
There are S&P 500 sub-sectors for each of the 20 industries listed above, many of which have exchange-traded funds that track them, making them largely accessible for investors.
Bannister's skeptical commentary shares some similarities with recent research published by Morgan Stanley. In the report, Mike Wilson, the firm's chief US equity strategist, laid out two major reasons why the S&P 500 has already peaked this year. And while he's nowhere near as bearish as Bannister, there's no denying that the tide is shifting somewhat amongst Wall Street's elite stock forecasters.
However, JPMorgan's Marko Kolanovic, perhaps the most influential equity strategist around, has a far more constructive view. He argues that a continuation of the so-called Goldilocks market of strong growth without inflation will keep stocks moving higher in the medium term.
With so many varying outlooks being bandied about, it's understandable to be confused about what lies ahead for stocks. No one truly knows how the rest of the year will unfold, and it looks like surging volatility will be keeping both strategists and investors on their toes in the coming months.