Don’t rush back to the stock market because there’s more pain to come if the economy continues to slow, says Stifel’s chief strategist

• Stocks have risen since last week’s sell-off, but there is still reason to be cautious, said Stifel’s Barry Bannister.

• Bannister said the Fed’s 2% inflation target is “just a pipe dream,” with the housing market expected to recover.

• He reiterated his expectation of a 10% market correction to push the S&P 500 to 5,000 points by October.

It may be tempting to return to the stock market as stocks stage a comeback after last week’s big rout, but investors should proceed with caution.

If the economy continues to slow and eventually enters a recession, a bear market is looming as inflation remains persistent, Stifel’s chief strategist Barry Bannister said in a statement. Tuesday interview on CNBC.

“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 and has previously called for a sharp drop in sky-high valuations. He confirmed his prediction of a A 10% market correction to push the S&P 500 to 5,000 points by Octobernoting that shares would still be quite expensive at that level.

He primarily pointed to inflation as a catalyst for further declines as it is “a little more persistent than people expect.”

While the Federal Reserve targets a PCE of 2.8%, Bannister expects the central bank to target closer to 3% in the fourth quarter due to ongoing housing inflation.

With markets all but guaranteed to see a rate cut in September, Bannister said there would certainly be a huge rebound in housing inflation by 2025, which would lead to more price pressure.

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

“The floor now looks like the ceiling of inflation in the 20 years before Covid. And that is a starting point for a higher step later, with a stronger economy in the mid-2020s,” he said.

Weak GDP, consumption, fixed investment and net export figures expected in the second half of the year also do not bode well for the economy, Bannister added.

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

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