Long-time market bull Phil Orlando issues a 10% correction warning.

Federated Hermes’ chief markets strategist warns that uncertainty over fiscal and monetary policy will prevent the market from breaking out of its recent rut.

“Another shoe could be dropped in the next five weeks,” Orlando told CNBC’s Trading Nation on Monday. “We see how events develop and develop here.”

Orlando went on guard watch in midsummer. He saw signs that a 5% to 10% air bubble was materializing and estimated that this would hit stocks between August and October. His concerns ranged from unexpectedly high inflation to Covid variants.

Orlando said those risks still exist, but Washington politics is now causing a major setback for stocks.

“On the monetary side, inflation is much hotter than the Fed and the government has prophesied,” he said. “We think inflation is sustained higher. That will result in the Federal Reserve changing its monetary policy, both in terms of throttling and rate hikes, much faster than they originally told us.”

He is also concerned about a possible change at the top of the Federal Reserve. Chairman Jerome Powell’s term ends in January. The process gives President Joe Biden the opportunity to change a President appointed by President Donald Trump.

Orlando is also citing legislature debates over the debt ceiling and trillions in infrastructure spending as major headwinds to the market.

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

Orlando warns that the background makes the growth trade, which includes big tech, particularly vulnerable.

“If we are right that some of these events create a 5% to 10% air cushion, we think technology stocks could be disproportionately affected,” said Orlando. “Maybe that would be a 10-20% move down.”

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

“There’s a tremendous catalyst to getting their profits and growth going, and they’re pretty far behind technology stocks – growth stocks,” he said. “There is a trade to catch up.”

Despite Orlando’s short-term corrective warning, he has higher expectations for the end of the year. Orlando’s S&P 500 year-end target is 4,800 and his year-end 2022 forecast is 5,300.

On Monday the index slipped 0.28% to close at 4,443.11.

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