‘The only leg the market is standing on is the Fed’: Strategist

Barry Bannister, Chief Equity Strategist at Stifel, joins Yahoo Finance Live to discuss the overall market outlook amid the U.S. economic recovery and the outlook on Bitcoin.

Video transcript

ALEXIS CHRISTOFOUROS: I want to continue our markets conversation and bring in Barry Bannister. He's chief equity strategist at Stifel. Barry, good to see you. So here we are in the third quarter. What do you like right now? And where do you see leadership for this market through the rest of the year?

BARRY BANNISTER: Well, the market's usually looking out-- if it's surprised, it looks out at most a month. Like when COVID hit last year in 2020, if you recall, the S&P sold off beginning around mid-February. And then of course, it became obvious a month later. Normally it leads by about three to four months. So we're already looking at the end of the year, way past the third quarter.

If we look at our call, on June 28, we wrote a detailed note saying that we thought that the defensives would outperform all of the cyclicals and that the market would drop, the S&P 500, as a good index. From then, 4,300 to 3,800. So far, we've been right on the sectors but wrong on the market. Market's gone up about 225 points since then on the index. However, five of the six best performing sectors since June 28 are defensive, and that's pretty remarkable.

When you have health care, consumer staples, like food, beverage, tobacco, when you have real estate, utilities, and communications outperforming the index, the only cyclical group that's beaten the market since June 28 is technology.

ALEXIS CHRISTOFOUROS: So are you foreseeing a correction for the S&P 500 here before we ring in 2022? And if so, what's going to lead that correction?

BARRY BANNISTER: A lot of news should hit on the slowdown side, a global slowing, particularly US and China, around October. So October is going to be a treacherous month. We'll know by the end of October if our call is right.

We've had a contraction of the growth rate, global money supply. Use M2, M2 money for people who study that school. If you translate all the world's money, China's about 35%. US is about 20% of the world's money, M2. Into dollars, on a year over year basis, it peaked in March this year, March 22. It's been declining sharply in terms of growth, from 22% growth year over year to about 9% or 10%.

The other thing is cyclicals relative to defensives. A strong market is not built on defensive leadership, period. That is a concern, I think, that the defensive sectors are doing well.

We see weakness in the purchasing manager indices starting next month and continuing for months thereafter. And China has slowed its stimulus. China is very important to global GDP. And China has really cracked down debt under Xi Jinping's China.

So the only thing, the only leg the market's standing on is the Fed, the Fed balance sheet and the financial conditions, which are very easy. So we have this flood of past liquidity combined with the easy Fed. And that's what's held up the market.

ALEXIS CHRISTOFOUROS: I want to get your thoughts on where you see Bitcoin in the portfolio, if at all, here in the third and fourth quarters. We know that Bitcoin, Jared was talking about it a moment ago, plunged but is starting to come back a little bit today on the very day El Salvador adopted Bitcoin as its national currency. I know it had some technical glitches today as well. But do you still see potential for Bitcoin in the portfolio? And if so how should an investor add it to their assets?

BARRY BANNISTER: Well, the El Salvador news is pretty much irrelevant. They're not any sort of a factor anywhere on anybody's radar screen for monetary matters. I mean, if Europe did it, that's big news. If China did it, big news. But El Salvador, I don't care.

As far as Bitcoin goes though, we have examined this extremely closely. Bitcoin is an asset that moves with global liquidity. So if you are going to increase that global M2 money for the last seven years, it's always been positive for Bitcoin. And when the global money supply growth is slowing, as it has been since March, Bitcoin has always fallen.

It's had 55% to 60% counter-trend rallies multiple times in seven years, which it just had one. I think Bitcoin goes to about $15,000 by the end of the year as this global liquidity slows and people realize that the Fed is tapering, the Chinese have tightened, the dollar is getting a flight to safety bid.

And I have some non-consensus views about COVID. And I think that's going to resurge in the cold states starting in October. So when that all hits, Bitcoin and being a spec asset is just going to plunge.

And then the other thing about Bitcoin is it moves opposite. That's called equity risk premium. That's fairly complex. And it's covered in my notes. But when the market goes risk off, Bitcoin goes risk off and vice versa. So I think it's going to be a terrible performer by year end.

ALEXIS CHRISTOFOUROS: All right, Barry Bannister, we're going to have to leave it there. Chief equity strategist at Stifel, thank you.