- Stocks are up since last week's sell-off but there's still reason to be cautious, Stifel's Barry Bannister said.
- Bannister said the Fed's 2% inflation goal is "just a pipe dream" with housing expected to rebound.
- He reiterated his expectation for a 10% market correction to push the S&P 500 to 5,000 by October.
It might be tempting to pile back into the stock market as equities stage a comeback after last week's big rout, but investors should tread lightly.
If the economy keeps slowing and eventually enters a recession, a bear market is imminent as inflation remains sticky, Stifel's chief strategist Barry Bannister said in a Tuesday interview on CNBC.
"It's funny, there's Goldilocks and the three bears, and I think the market not only believes in Goldilocks, but it thinks the three bears are extinct species," Bannister said.
Bannister has been cautious on stocks this summer and has previously called for a sharp pullback from sky-high valuations. He backed up his prediction of a 10% market correction to push the S&P 500 to 5,000 by October, noting that stocks at that level would still be fairly expensive.
He pointed primarily to inflation as the catalyst for further declines, as it has been "a little stickier than people expect."
While the Federal Reserve targets a PCE of 2.8%, Bannister expects the central bank to target closer to 3% by the fourth quarter due to persistent housing inflation.
With markets seeing a September rate cut as all but guaranteed, Bannister said there will surely be a huge rebound in housing inflation by 2025, which would cause more pricing pressure.
Those factors mean the Fed's goal for 2% inflation is "just a pipe dream," he said.
"The floor now looks like what was the ceiling in the 20 years pre-Covid for inflation. And that's a launching point for a higher move later with a stronger economy in the mid-twenties," he said.
Weak GDP, consumption, fixed asset investment and net export data expected in the second half of the year also don't bode well for the economy, Bannister added.
"Brokers love bull markets, it sells stock," he said. But "the market's naturally manic depressive," and it "swings from one extreme to the other," he added.