Approach that buy button cautiously. 

Investment bank Stifel projects that the S&P 500 could fall 5% by the third quarter of 2018. Here are several reasons why. 

The S&P 500 Is Behaving Oddly

While the U.S. itself has not faced a recession since 2008, "stocks have been acting as if [the fourth quarter of 2015] to [the first quarter of 2016] was a recession...that is now transitioning to a Fed real rate cycle." 

Stifel says that this pattern has been historically indicative of the S&P 500 falling as real rates rise. 

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"In the years 2018 to 2019, we see real rates rising and the S&P 500 P/E falling as part of the process of 'normalizing' the cost of money," says Barry Bannister, managing director at Stifel Nicolaus and author of the report, to TheStreet.

He explained, "Will they normalize the real (after inflation) cost of money? Well, Jerome Powell said at his Senate confirmation hearings in November 'We have been patient in removing accommodation, and I think that patience has served us well...it's time for us to be normalizing interest rates.' Perhaps they won't, but that back-tracking would only occur if they are worried about something. And if the Fed is worried, then investors should be worried."

Don't Forget the ECB 

Given the market's current situation, Stifel projects that Mario Draghi of the European Central Bank (ECB), "needs rate hikes to smooth the way for his successor. Departing Fed chiefs have always tightened in the year before their departure, endowing successors with policy flexibility. Draghi's ECB term ends Oct. 2019, and given the homogeneity of central bankers we doubt he leaves his successor a negative rate. For the ECB to raise rates, however, they need a stable euro, which thus requires Fed rate hikes and dollar strength."

"If we are wrong (if the dollar falls) then oil rises prompting inflation and the Fed tightens anyway," Bannister says. In other words, the market could come under pressure quickly.  

The ECB will hold its next meeting on May 16. 

 

Stifel's CEO recently discussed the market's outlook with TheStreet's Executive Editor Brian Sozzi. Watch below.