Is it time for a stock mar­ket cor­rec­tion?

Northern News (Kirkland Lake) - - BUSINESS - JONATHAN RATNER

If you’re keep­ing track of the on­go­ing rally for the S&P 500, you’ll know that the in­dex has gone 318 days with­out a cor­rec­tion of five per cent or more. That makes this the long­est such run since 1960.

While that may make some in­vestors ner­vous con­sid­er­ing the S&P 500 con­tin­ues to hit fresh all-time highs, there is at least one good rea­son why a sharp pull­back or lengthy re­treat doesn’t ap­pear to be on the hori­zon.

Sté­fane Mar­ion, chief econ­o­mist and strate­gist at Na­tional Bank Fi­nan­cial, high­lighted the eq­uity risk pre­mium — the spread be­tween the re­turn on stocks and that of risk-free in­vest­ments such as U.S. Trea­sury bonds. That’s largely be­cause long-term trea­sury yields are ris­ing rather slowly, as in­fla­tion re­mains low.

Not only does this mar­ket mea­sure look at­trac­tive by his­tor­i­cal stan­dards, but there is good rea­son to be­lieve U.S. eco­nomic growth will re­cover from the dam­age in­flicted by ma­jor storms.

“Though eco­nomic growth may have been soft­ened a bit in the third quar­ter by hur­ri­cane dis­rup­tions, the U.S. did not sus­tain long-term dam­age to its in­dus­trial plants,” Mar­ion said. “Eco­nomic growth should thus bounce back fairly quickly, as we have seen with the be­gin­ning of re­con­struc­tion.”

The strate­gist noted that the earn­ings out­look could get a boost from Washington’s pro­posed cut to the ba­sic cor­po­rate tax rate, as well as a one-time repa­tri­a­tion tax holiday. In an ef­fort to bol­ster growth, a White House plan to pro­vide tax re­lief to the mid­dle class may also pro­vide a lift to earn­ings.

“So for now, the U.S. stock mar­ket seems to be en­joy­ing some continuing tail­winds,” Mar­ion said. “Though nor­mal­iza­tion of mone­tary pol­icy is an el­e­ment of risk, there is some way to go be­fore it reaches a point that could be called re­stric­tive.”

Ex­pec­ta­tions for tax stim­u­lus have also pushed the Dow Jones In­dus­trial Av­er­age, Nas­daq, Rus­sell 200 and NYSE com­pos­ite to record highs, but David Rosen­berg isn’t all that op­ti­mistic.

The chief econ­o­mist and strate­gist at Gluskin Sh­eff + As­so­ciates ac­knowl­edged that mar­ket breadth is cur­rently a promis­ing indi­ca­tor (the NYSE ad­vance/de­cline line con­tin­ues to trend higher), and the over­all tech­ni­cal back­drop for stocks has im­proved. How­ever, he said “there is not a snow­ball’s chance in hell” that fis­cal hard­lin­ers in the Repub­li­can party will pass a tax bill that leaves a mas­sive hole in the U.S. bud­get.

He also noted that three-quar­ters of the gains in the ISM Pur­chas­ing Managers In­dex was at­trib­ut­able to the two re­cent hur­ri­canes that hit the U.S.

When it comes to mar­ket volatil­ity, Rosen­berg pointed out that only twice has it been this low. The VIX re­cently closed at its fifth low­est level ever, and stocks have only been this ex­pen­sive 10 per cent of the time on record, yet new highs con­tinue to be made.

“Worth keep­ing this in mind as the mar­ket nar­ra­tive has swing mas­sively bullish,” the strate­gist said.

The Cana­dian stock mar­ket isn’t nearly as strong as its U.S. coun­ter­part, but the S&P/TSX Com­pos­ite In­dex is mak­ing a come­back. Septem­ber’s 2.8 per cent gain was the strong­est per­for­mance in 14 months, and the in­dex’s year-to­date re­turn is now in pos­i­tive ter­ri­tory (up more than two per cent).

“We see fur­ther up­side for the S&P/TSX ahead,” Mar­ion said, point­ing to brisk Cana­dian eco­nomic growth, strong em­ploy­ment trends, ro­bust wage and salary gains, and pre-elec­tion spend­ing in sev­eral prov­inces com­ing in Jan­uary 2018.

The strate­gist also note that S&P/TSX earn­ings re­vi­sions have turned pos­i­tive, whereas S&P 500 have shifted slightly down­ward. In Canada, the up­ward re­vi­sions have oc­curred in seven of the 11 main sec­tors.

How­ever, the pri­mary rea­son Mar­ion prefers Canada over the U.S. is be­cause of val­u­a­tion, as the S&P/TSX is trad­ing at a sig­nif­i­cant dis­count to the S&P 500.

He rec­om­mends an over­weight in fi­nan­cials, as the sec­tor should ben­e­fit from ris­ing in­ter­est rates in a strong Cana­dian econ­omy.


Traders work on the floor of the New York Stock Ex­change at the clos­ing bell. With the S&P 500 at an all-time high, there is some worry that a cor­rec­tion could hap­pen at any time.

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