StockTake: Is a correction overdue?
It’s been over two years since the S&P 500 suffered a 10 per cent correction, with the index advancing 60 per cent since then.
So, is a correction well overdue?
Not really, Bespoke Investment Group noted last week. Yes, it’s a lengthy run by historical standards, but the bull market between March 2003 and October 2007 lasted twice as long before a double-digit decline occurred.
Even that is dwarfed by the seven-year surge between October 1990 and October 1997 – the longest winning streak on record.
Both bull markets ended suddenly – the 1997 Asian financial crisis triggered one of the biggest one-day declines in history before indices swiftly rebounded, while the 2007 bull was followed by an epic 57 per cent collapse in the S&P 500.
Still, bulls will argue that, for now, the trend is their friend, and that trend may extend for some time yet – the current rally would have to last until October 2018 to match the 1990s’ bull run.
It’s the season of happy returns
Indeed, seasonal patterns indicate an acceleration in market momentum, as almost all market gains over the last 50 years were concentrated in the November-April period.
The so-called Halloween indicator is not confined to the US.
A famous study by finance professor Ben Jacobsen looked at 108 countries over a 319-year period, and found November-April produced returns of 6.9 per cent compared to 2.4 per cent from May through October. That 4.5 percentage point gap has widened, to 6.25 per cent, over the last 50 years.
The Halloween effect was evident in 81 countries, and especially obvious in Europe, North America and Japan. Only Nepal and Bangladesh recorded stronger summer returns.
Of course, indices enjoyed strong gains this summer, but market commentator Mark Hulbert found that that actually augurs well for further momentum.
His data shows that, over the last 50 years, the S&P 500 has averaged gains of 9.6 per cent during November-April following strong summers, compared to just 5.3 per cent after losing summers.
Irish equities to lag global performance
Global equities should enjoy strong gains over the next five-to-10 years, but returns from Ireland and the US will be among the weakest in the world, according to a new paper by investment manager Joachim Klement.
The study is based on cyclically adjusted price-earnings ratios, which average earnings over a 10-year period, as popularised by Nobel economist Robert Shiller.
The Shiller P/E is then tweaked by adjusting for economic conditions in each country.