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Is Another Market Bubble About to Burst? These Analysts Think So

A Stifel Equity Research team predicts that the S&P 500 index will see a correction in the first quarter of next year.

The market is headed for an impending bubble burst, with “poor monetary and fiscal decisions since COVID-19” pushing it into shaky territory, a team lead by Barry Bannister, managing director and market strategist for Stifel Equity Research, said Monday.

As reported by MarketWatch, Bannister's team predicts that the S&P 500 index will see a correction in the first quarter of next year, dropping to the low 4,000s. 

“Later in 2022-23E, we believe the ‘behind-the-curve’ Fed might create the third bubble in 100 years, by 2023 to 6,750 for the S&P 500 (Nasdaq [approximately] 25,000),” the Stifel team said, MarketWatch reports.

“Populism (which the Fed and Treasury seemingly embrace) leads to poor choices and even worse outcomes. Rate repression may again create a bubble that bursts (always do), followed by a lost decade,” it said.

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As evidence, Bannister's team points to the S&P 500 dropping by nearly 20% in the third quarter of 1998 before the dot-com bubble burst in 1999-2000, as well as a 10.7% drop in December 1928, right before the October 1929 crash.

The Stifel team recommends that the Fed begin a tilt into "hawkish" territory to stave off major market disruptions.

“Still, policy may arrive too late, and if the market goes ‘risk-on’ with a falling Equity Risk Premium and if the 10Y Treasury Inflation Protected Security (TIPS) yield remains repressed at -1.0% due to global central banks, a P/E [price-earnings] convexity bubble in 2022-2023E may occur,” the note says.

Should the S&P start to show signs of weakness, he recommends investing in safer areas such as healthcare, consumer staples, utilities and telecommunications.