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

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 SPX, +0.33%, 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 BTCUSD, +4.77% and copper HG00, -0.54%, 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 buzz

Tesla TSLA, -1.17% is recalling more than 285,000 vehicles in China, including more than 90% of the cars the company makes locally, because of safety risks associated with the cruise control system, the Chinese market regulator said Saturday. The regulator said an investigation found that the Teslas cruise control system could be accidentally activated and potentially result in an unexpected speed increase.

It’s a light day on the U.S. economic front. Investors can expect more questions about inflation when the New York Federal Reserve President John Williams speaks at 9:00 a.m. Eastern, before the Dallas Fed publishes Texas’ manufacturing outlook survey.

More than 150 people remain missing at the site of the condo building that collapsed in Miami, Florida, early last Thursday, with nine people confirmed dead. No one has been pulled alive from the rubble since hours after the collapse on Thursday.

Over the weekend, the U.K.’s lead financial regulator banned Binance, one of the world’s most popular crypto exchange networks, in the latest regulatory crackdown on digital assets. But cryptos have shrugged off the news, with the likes of bitcoin, ethereum ETHUSD, +10.22%, and dogecoin DOGEUSD, +4.68% surging.

European-listed shares in Nokia NOKIA, +6.13% jumped more than 6%, catching up the U.S.-listed stock’s NOK, +6.03% rally from Friday after investment bank Goldman Sachs upgraded the telecom equipment maker to buy from neutral.

The markets

U.S. stock market futures were mixed YM00, -0.11% ES00, +0.05% NQ00, +0.30%, while European equities were broadly lower SXXP, -0.10% UKX, -0.26% PX1, -0.25% DAX, +0.16% along with Asian stocks NIK, -0.06% HSI, -0.07% SHCOMP, -0.03%.

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:

Random reads

Doe, doh! Two Australian men were sunbathing nude on a beach when they were startled by a deer—so they ran into a nearby forest, and got lost. Police fined the pair after aircraft and emergency services were scrambled to rescue them.

“I’ve never seen that many zeros”: A couple from Baton Rouge, Louisiana were the recipients of $50 billion mistakenly deposited into their bank account.

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