• Stock prices have risen since last week’s sell-off, but there is still reason for caution, said Stifel’s Barry Bannister.
• Bannister said the Fed’s inflation target of 2 percent was “just a pipe dream” and that a recovery in the housing market was expected.
• He reiterated his expectation that a 10% market correction would push the S&P 500 to 5,000 by October.

It may be tempting to get back into the stock market as stocks make a comeback after last week’s big drop, but investors should be cautious.

If the economy continues to weaken and eventually drifts into recession, a bear market is imminent as inflation remains sluggish, Stifel chief strategist Barry Bannister said in an interview with CNBC on Tuesday.

“It’s funny, there’s Goldilocks and the Three Bears, and I think the market not only believes in Goldilocks, but also thinks the Three Bears are extinct species,” Bannister said.

Bannister has been cautious on stocks this summer, having previously predicted a sharp pullback from sky-high valuations. He backed up his prediction that a 10% market correction would push the S&P 500 to 5,000 by October, noting that stocks would still be quite expensive at that level.

He pointed in particular to inflation as the trigger for further declines, as it was “somewhat more sluggish than expected”.

While the Federal Reserve is targeting a PCE of 2.8 percent, Bannister expects the central bank to target closer to 3 percent by the fourth quarter due to ongoing inflation in the housing market.

With markets seeing a September rate cut as all but certain, Bannister said there was certain to be a significant increase in property inflation by 2025, putting further pressure on prices.

These factors mean that the Fed’s inflation target of 2 percent is “just a pipe dream,” he said.

“The lower bound now looks like what the upper bound of inflation looked like in the 20 years before Covid. And that is a starting point for a later uptrend with a stronger economy in the mid-twenties,” he said.

Weak data on GDP, consumption, fixed asset investment and net exports expected for the second half of the year also do not bode well for the economy, Bannister added.

“Brokers love bull markets, they sell stocks,” he said. But “the market is manic-depressive by nature” and “swings from one extreme to the other,” he added.