Top Wall Street Guru Sees Potential 5% to 10% Drop in Next 6 Months

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).

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.

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.