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June 29, 2021, 3:38 a.m. EDT

Buy these stocks as S&P 500 heads for 11% correction and bitcoin risks fall to $12,000, say strategists.

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Jack Denton

Stocks are pushing higher and crypto is surging, as the slow days of summer trading continue to keep the sun shining on financial markets.

It may not last for long.

Our call of the day , from strategists Barry B. Bannister and Thomas R. Carroll at the equity trading desk of investment bank Stifel, is that the S&P 500 is heading for an 11% pullback while bitcoin could fall to $12,000.

The “recovery trade” that has defined the recent bull market is headed for a further correction in the second half of 2021, the strategists said. Cyclical stocks—industrials, energy, materials, financials, tech, and discretionary—will fall relative to defensive stocks like staples, healthcare, utilities, and real estate, Bannister and Carroll said.

This will weigh down the S&P 500 /zigman2/quotes/210599714/realtime SPX -0.42% , and Stifel’s strategists say that the blue-chip index is heading for an 11% drop to 3,800 points.

The likely catalysts for this major shift, according to the team at the investment bank, are the U.S. PMI Manufacturing Index fading faster than expected in the second half of the year, and the dollar strengthening.

Bannister and Carroll said the primary causes are a slowing global money supply in U.S. dollar terms—as central banks ease pandemic-era supports—as well as distortions from quantitative easing, and the lagged effect of China’s policy tightening.

A sea change of this magnitude will create distinctive winners and losers, the strategists said. Investors can prepare by buying shares in companies focused on defensive industries: pharma and biotech; food and staples retailing; commercial and professional services; food, beverage, and tobacco; utilities; healthcare equipment and services; household products; consumer services; and telecommunications.

But avoid the stocks set to be losers, identified by the team at Stifel as: banks; insurance; software and services; real estate; energy; diversified financials; semiconductors; technology hardware; materials; capital goods; and autos and components.

Other casualties that Bannister and Carroll expect to see are bitcoin /zigman2/quotes/31322028/realtime BTCUSD -0.39% and copper /zigman2/quotes/210054311/delayed HG00 +0.32% , which are both sensitive to slowing global liquidity and the stronger dollar. The strategists at Stifel see bitcoin falling from around $34,000 to $12,000 if global M2—a measure of the money supply—drops to low-single digits year-over-year, as they expect.

The markets

U.S. stocks were mixed but mostly higher /zigman2/quotes/210598065/realtime DJIA -0.18% /zigman2/quotes/210599714/realtime SPX -0.42% /zigman2/quotes/210598365/realtime COMP -1.19% , while European equities were broadly lower /zigman2/quotes/210599654/delayed XX:SXXP -0.01% /zigman2/quotes/210598409/delayed UK:UKX +0.08% /zigman2/quotes/210597958/delayed FR:PX1 -0.03% /zigman2/quotes/210597999/delayed DX:DAX +0.15% along with Asian stocks /zigman2/quotes/210597971/delayed JP:NIK -0.65% /zigman2/quotes/210598030/delayed HK:HSI -1.96% /zigman2/quotes/210598127/delayed CN:SHCOMP -0.54% .

The charts

“Investor expectations are way out of whack with reality,” according to Michael Batnick, of the Irrelevant Investor financial blog

Our chart of the day, from investment bank Natixis , via Batnick, shows the expectation gap between financial professionals and individual investors in 17 countries—and that American investors expect 17.5% real returns over the long term.

“The S&P 500 has returned 10.4% over the long term. The idea that we’re going to get 17% real, after getting 17% nominal over the last 5 years, is nothing short of absurd,” Batnick said.

Moreover, return expectations have continued to rise year-over-year:

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