The analyst who called the correction now sees a bear market starting within a year

  • Barry Bannister, Stifel's head of institutional equity strategy, is telling clients to prepare for a big market drop.
  • "Our models for the S&P 500 point to minimal price upside in 2018 and a bear market (-20%) in the coming year," he writes.
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The stock strategist who predicted the S&P 500's drop earlier this year now expects a big market decline within 12 months.

Barry Bannister, Stifel's head of institutional equity strategy, is telling clients to prepare for a bear market and buy defensive stocks that perform better during periods of market turmoil.

"Our models for the S&P 500 point to minimal price upside in 2018 and a bear market (-20%) in the coming year. What matters for investors is that any decline is likely to be unusually rapid and occur as a result of P/E compression, resulting from policy risks not weak GDP," Bannister wrote in a note to clients entitled "The Fed's 'forced error': It's time to start moving to more defensive positions."

Bannister said on Jan. 26, the day of the S&P's record high, that stocks will correct at least 5 percent this quarter as the Federal Reserve and other central banks tighten monetary policy. The S&P 500 subsequently dropped 10 percent through early February.

The strategist is still concerned about monetary policy. The Federal Reserve raised the benchmark funds rate Wednesday by 25 basis points to 1.75 percent. It was the sixth rate hike since December 2015.

In his note Wednesday, Bannister said the Fed's outlook for the economy points to more aggressive rate hikes.

"We're concerned the Fed's 2019-20 view grew more hawkish," he wrote. "We now expect deflationary policy errors to develop in 2018 to early 2019."

As a result, the strategist recommends investors buy stocks in "defensive" areas such as utilities, consumer household products and food companies.

Bannister reaffirmed his 2,800 S&P 500 price target, representing 3 percent upside to Wednesday's close. He cautioned the forecast may change on any sign of a sudden "break down" in the market.