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.

Ireland looks fairly priced using the conventional Shiller P/E but very expensive once adjusted for macroeconomic variables. Klement estimates the Irish market will, adjusted for inflation, be just 7 per cent higher in five years’ time, or 30 per cent higher over a 10-year period. Of 38 countries analysed, Ireland ranks 35th. The US is hardly better, ranking 34th.

Most developed markets, however, should secure high single-digit returns, while emerging markets also look good over a 10-year horizon. Germany and Japan are fairly valued, while France, Italy and Spain look extremely cheap. Smaller European countries like Austria or Belgium "promise exceptionally high returns", but the winner is unloved Greece – over the next five years, its stock market is projected to nearly triple in real terms.

The paper is at

First gay-friendly index
Credit Suisse has created the first stock index based on gay-friendly policies.

The LGBT Equality Index consists of 201 companies drawn from the S&P1500, the firms selected on the basis of criteria devised by the Human Rights Campaign group. An exchange-traded fund (ETF) based on the index is forthcoming.

Credit Suisse said it hoped to show “positive correlation between pro-LGBT policies … and the bottom line”.

However, backtesting shows the index has slightly lagged over the last five years, returning 13 per cent annually compared to 15 per cent for the S&P 500.

Rosenberg mauled by bears
Gluskin Sheff strategist David Rosenberg (above) has been termed a perma-bear for most of the last decade. The ex-Merrill Lynch man predicted the global financial crisis and remained bearish even as markets surged in recent years, outraging bulls (a US military veteran last year interrupted a bearish Rosenberg speech with a rendition of the Star-Spangled Banner).

Rosenberg has become more bullish of late, however, disgusting many of his bearish supporters. One called him a “turncoat”, he told the Wall Street Journal last week. Another wrote: “Cancel my account, and tell Dave I don’t recognise his work. He used to be the straightest shooter out there … it is too much for me to have another cheerleader.”

“I’m finding out that a lot of my loyal readers were never really interested in my analysis,” Rosenberg said. Ironically, he remains cautious, recommending clients have just over half of their portfolio in stocks, up from 35 per cent last year. Imagine the reaction if he truly did become “another cheerleader”.