Get Ready for a Bear Market in Stocks, Stifel's Bannister Says

(Bloomberg) -- This might be as good as it gets.

Or at least that’s what Stifel Nicolaus equity strategist Barry Bannister says in his latest note to clients, where he sees the possibility of a bear market in stocks by the first quarter.

Bannister uses two valuation measures -- Shiller’s Cycle-Adjusted P/E (commonly referred to as the CAPE Ratio) and Tobin’s Q, which measures aggregate price/replacement book -- and household stock ownership to back his thesis.

"The three methods imply a very low single-digit S&P 500 return from 2018 to 2028E," he wrote, adding that the model indicates a 2,283 level for the index by the end of February. This would imply a decline from the record peak of more than 20 percent, hence a bear market.

Bannister is no stranger to negative calls on the U.S. stock market. In June, he called for a 5 percent decline in the S&P 500 on trade tensions and speculation of faster monetary tightening. And just last month, he said that two more interest-rate increases from the Fed could trigger a bear market.

In his report dated Oct. 5, he outlined several macroeconomic concerns to go along with his bearish view on stocks. For example, he sees trade risks rising if the Democrats take back the House: "Post-midterms will be 2 years before Nov-2020, so Trump has an incentive to ’go big’ on risk."

He also expects China to be declared a "currency manipulator” in the October treasury review, adding to further trade conflict concerns, and sees a "danger to economic growth" from oil risks related to Iran sanctions and a Venezuela collapse.

To contact the reporter on this story: Kriti Gupta in New York at kgupta129@bloomberg.net

To contact the editors responsible for this story: Courtney Dentch at cdentch1@bloomberg.net, Arie Shapira

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