The stock market is poised for a prolonged sell-off later this year after a brief rally driven by seasonal trends, Stifel says

• Stocks are poised for a 5% relief rally over the next month before continuing their downtrend, according to Stifel.
• The research firm sees the S&P 500 jumping to at least 4,400 on positive seasonality trends.
• But investors should sell rather than buy as Stifel sees the S&P 500 falling to 4,000 by October.

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Investors shouldn't get too excited about a relief rally in the stock market as it's poised to be a selling opportunity rather than a buying opportunity, according to a Monday note from Stifel's Barry Bannister.

The research firm said it expects the S&P 500 to rally between as much as 9% from current levels to the range of 4,400-4,600 as a period of positive seasonality takes hold in the market. While a relief rally is likely to unfold by the end of April, it will be followed by a prolonged sell-off to a level not seen since April 2021.

From May to October, Bannister expects the S&P 500 to trend lower towards the 4,000 level, which represents potential downside of about 5% from current levels. That time frame coincides with Wall Street's favorite "sell in May and go away" mantra, which is a nod to the seasonal weakness the stock market has historically experienced during summer months. 

The fundamental risks the could drive such a sell-off include persistent inflation that ultimately leads to a period of stagflation, aided by sanctions against Russia raising costs for consumers and businesses, according to Bannister.

"A risk is that sanctions on Russia continue after a possible peace deal, furthering Russian embargoes targeting Western GDP," Bannister said, adding that his downside S&P 500 target to 4,000 assumes the US won't enter a recession in 2022.

Bannister sees the S&P 500 trading range bound between as high as 4,600 and as low as 4,000 over the coming months, but even longer-term, Bannister expects a gloomy lost decade ahead for stock investors.

"Every measure we have shows 0% return the next decade" for the S&P 500, Bannister said, pointing to valuations and equity ownership levels among investors.

"The S&P 500 total return index may be no better than flat in December 2031 with the level of December 2021. That implies a slightly negative compound price return offset by an equally positive dividend return. Such a turn of events would cause missed pension and retirement goals and disenchantment with indexing," Bannister said.

"The 'cost' of a strong S&P 500 the past 10 years is a weak return the next 10 years," Bannister said.