- The stock market's volatile decline is likely to continue as Monday's recovery was a "head fake," according to Stifel.
- The firm expects the S&P 500 to fall to 4,200, representing potential downside of 5% from Monday's close.
- These are the five things that need to happen before the stock market can bottom, according to Stifel.
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Investors in the US stock market shouldn't expect an immediate recovery following Monday's volatile trading session, in which the Nasdaq 100 fell nearly 5% intraday before ending the day positive.
That's according to Wall Street research firm Stifel, which said in a note that Monday's surprising recovery was a "head fake" and that the correction in stocks is likely to continue. The S&P 500 is 10% below its high again, re-entering correction territory on Tuesday, while the Nasdaq 100 is down more than 15% from its record high.
Stifel's Barry Bannister believes the S&P 500 is likely to find a bottom near 4,200 by the end of the first quarter. A decline to those levels represents an additional 5% downside from Monday's close. The S&P 500 fell about 2% to 4,327 in Tuesday morning trades.
According to Bannister, these are the five things that need to happen before the stock market can find its bottom.
1. 'The Fed would have to turn more dovish.'
"Such a dovish turn would likely lower the 10-Year TIPS (treasury inflation protected securities) real yield which has been pressuring growth stock P/E ratios much more than for value. Fading inflation with a sticky nominal 10-Year Treasury yield is our expectation for the peak of the 10-Year TIPS yield, which we do not believe has occurred."
2. 'The US PMI Manufacturing Index would have to bottom.'
"We doubt [this] occurs before then end of 1Q22, with the capitulatory March 2022 low print for the PMI Mfg. Index potentially occurring April-1, 2022. We note that the PMI index year-over-year change correlates with or leads year-to-year S&P 500 price, EPS and US Industrial Production."
3. 'Global M2 money supply growth would have to decisively bottom.'
"[This] is unlikely to occur until China's currency weakens. We believe the next 'shoe to drop' is China's currency slipping from a strong 6.33 per $1 to around 6.75 per $1. China is 37% of global money supply in dollar terms and a weaker Chinese yuan would send the dollar up and growth in global money supply in dollar terms down, tightening US financial conditions and lowering the P/E ratio for the S&P 500."
4. 'S&P 500 quarterly EPS "beats" minus "misses" will have to bottom.'
"When EPS beats minus misses are under pressure, in this case falling below the long-term trend, investors in the S&P 500 must learn to live with diminished policy support while also being subject to a lessening of the year-over-year change in S&P 500 price."
5. 'Ukraine will have to be settled in a way that does not diminish US living standards.'
"In many ways it appears that Russian President Putin is 'playing chess' while the West is 'playing checkers,' such as NATO moving troops to Eastern Europe while leaving Ukraine exposed. Russia only has designs on eastern Ukraine and our assessment is that Russia has the non-dollar reserves, power over EU energy flows, popular support in Russia and firepower to accomplish their goal of a USSR-style buffer zone separating them from the West."