- A "behind-the-curve" Fed could inflate the third stock market bubble in 100 years, according to Stifel's Barry Bannister.
- Bannister sees the S&P 500 rising as much as 45% by mid-2023 on poor monetary decisions.
- "The only way to prevent that systemic risk since bubbles always burst is for the Fed to tilt hawkish," Bannister said.
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The stock market could be on the verge of a massive surge higher if the Federal Reserve doesn't quickly lean into a hawkish policy stance, according to Stifel's Barry Bannister.
In a Monday note, he outlined his view that the S&P 500 could surge 45% to 6,750 by mid-2023 due to a "behind-the-curve" Fed that is well overdue in ending its monthly bond purchasing program and raising interest rates. Bannister also sees the Nasdaq jumping as much as 64% to 25,000 if the Fed continues to repress interest rates.
The Fed could avoid sparking the third stock market bubble in a century if it sticks to a hawkish policy of higher interest rates to tame inflation, according to the note, but any hiccup in the economy or a significant resurgence in COVID-19 could derail that path.
"If the past 225 years of history is a guide, populism (which the Fed and Treasury seemingly embrace) leads to poor choices and even worse outcomes," Bannister explained. "We believe the only way to prevent that systemic risk since bubbles always burst is for the Fed to heed its own financial stability report and tilt hawkish."
Investors will get a sense of the Fed's policy direction this afternoon as Chairman Jerome Powell is expected to announce a hastened taper of monthly bond purchases and potentially indicate how many interest rate hikes could come next year.
If the Fed fails to prevent another bubble in stocks, a lost decade may be upon investors, similar to the sideways market returns for investors in the 1930s and 2000s after the Roaring 1920's and dot-com bubble, respectively.
And a short-term correction in stocks early next year wouldn't invalidate the potential for a stock market bubble sparked by the Fed, according to the note.
"A correction before a final bubble is normal. For example, the -19.4% S&P 500 decline in the third quarter of 1998 before the 1999-2000 tech bubble... The same thing happened in the Roaring 20's, with a -10.7% mid-December 1928 drop as rates rose before the October 1929 crash," Bannister said.
