Market bull issues 10% correction warning, blaming the inflation fallout and Washington policy uncertainty

September 29, 2021: -Long-time market bull Phil Orlando delivers a 10% correction warning.

Federated Hermes’ chief market strategist warns the uncertainty surrounding fiscal and monetary policies will prevent the market from breaking out of its recent rut.

“There could be a shoe to drop over the next five weeks or so,” Orlando told CNBC on Monday. “We see how events develop and evolve here,” Orlando added.

Orlando went on pullback watch in midsummer. He saw signs that a 5% to 10% air pocket was materializing, and he estimated it would strike stocks in the August through October period. His worries spanned from hotter-than-expected inflation to Covid variants.

According to Orlando, those risks still exist, but Washington policy is now setting stocks up for a significant setback.

“On the monetary policy side, inflation has been running much hotter than the Fed, and the administration has been prophesying,” he said. “We think inflation is more sustainably higher. That’s going to result in the Federal Reserve changing monetary policy both in terms of their taper and their interest rate increases much more quickly than they originally told us.”

He’s also concerned about a potential change at the Federal Reserve’s helm. Chair Jerome Powell’s term is up in January, and the expiration allows President Joe Biden to change a President Donald Trump appointee.

Orlando lists lawmakers’ debates over the debt ceiling and trillions in infrastructure spending as significant market headwinds.

“This is a very critical week,” he said. “All of those discussions are very much in flux, so any combination of these developments in Washington could be ripe for another leg down in stocks.”

Orlando cautions that the backdrop makes the growth trade, which includes Big Tech, particularly vulnerable.

“If we’re right that there’s a 5 to 10% air pocket coming due to some of these events, the technology stocks we think could get hit disproportionately,” said Orlando. “Maybe that would be a 10% to 20% move to the downside.”

Instead of technology, he would focus on buying stocks tied to the economic recovery and have pricing power on weakness. Orlando particularly likes energy, financials, industrials, consumer discretionary, materials, small-cap stocks, and international developed markets.