David Ber­man Af­ter a tur­bu­lent week for stocks, some in­vestors see signs of his­tory re­peat­ing it­self

The Globe and Mail (Prairie Edition) - - REPORT ON BUSINESS - MAR­KETS

Stocks were hit hard this week – can the dip ear­lier this year in­di­cate what’s to come?

As in­vestors pon­der whether the re­cent bout of stock mar­ket tur­bu­lence is over, a use­ful tem­plate is emerg­ing: the last bout of mar­ket tur­bu­lence. But will the pat­tern re­peat? Stocks were ham­mered on Wed­nes­day and Thurs­day, when U.S. in­dexes suf­fered their big­gest losses since Fe­bru­ary. The S&P 500, as of midday Thurs­day, was down 7 per cent from its record high in Septem­ber, rais­ing the ques­tion of whether a buy­ing op­por­tu­nity was at hand – or more losses.

On Fri­day, stocks took one step to­ward sta­bil­ity. The S&P 500 rose 38.76 points, or 1.4 per cent, to 2,767.13, mark­ing its first gains af­ter six con­sec­u­tive days of losses. The rally fol­lowed bet­ter-than-ex­pected quar­terly prof­its from large U.S. banks, in­clud­ing JPMor­gan Chase & Co., and up­beat trade data from China.

Canada’s S&P/TSX Com­pos­ite In­dex rose 97.16 points, or 0.6 per cent, to 15,414.29.

One day of trad­ing doesn’t es­tab­lish a mean­ing­ful trend. But it may sug­gest that some in­vestors are tak­ing their cues from an ear­lier down­turn this year, when the S&P 500 slid 10 per cent from late Jan­uary to early April, and then re­bounded to fresh record highs within 10 weeks.

One com­pelling sim­i­lar­ity be­tween the two down­turns is a tech­ni­cal in­di­ca­tor. In early April, the S&P 500 fell be­low its 200-day mov­ing av­er­age, a move that sug­gested to some in­vestors that stocks had be­come deeply over­sold. As it turned out, the worst was in­deed over: The in­dex ral­lied from this point.

This time around, the S&P 500 fell be­low its 200-day mov­ing av­er­age on Thurs­day – and then re­bounded.

The sim­i­lar­i­ties don’t end there. The ear­lier down­turn, as with the cur­rent one, was also driven largely by ris­ing bond yields.

At the start of the year, the yield on the 10-year U.S. Trea­sury bond was about 2.4 per cent. But as the yield rose above 2.8 per cent, many in­vestors grew ner­vous that the bond mar­ket was sig­nalling ris­ing in­fla­tion­ary pres­sures, shrink­ing profit mar­gins and slow­ing eco­nomic ac­tiv­ity.

Yield-sen­si­tive stocks such as util­i­ties and eco­nom­i­cally sen­si­tive stocks such as en­ergy pro­duc­ers and tech­nol­ogy were hit par­tic­u­larly hard.

But as bond yields be­gan to coast side­ways, gen­er­ally be­low 3 per cent, in­vestors ac­cepted the higher yields and re­gained con­fi­dence in the econ­omy.

This time around, bond yields rose from about 2.8 per cent in Septem­ber to as much as 3.25 per cent this week, mark­ing a fresh seven-year high and reignit­ing the same con­cerns over what the bond mar­ket was sig­nalling. Some ob­servers said that third-quar­ter fi­nan­cial re­sults, set to turn into a del­uge of re­port­ing next week, would pro­vide clues about how tar­iffs and ris­ing wages might be cut­ting into profit mar­gins.

But once again, the yield on the 10-year bond is re­treat­ing from its highs. On Fri­day, the yield fell to about 3.14 per cent, sug­gest­ing that per­haps the worst is over.

Stock val­u­a­tions of­fer a third clue about whether a re­bound will take hold. Dur­ing the prior stock mar­ket down­turn, the price-to-earn­ings ra­tio for the S&P 500 fell from 23.4 in late Jan­uary (based on trail­ing earn­ings) to a low of 20 in early April, when stocks bot­tomed out.

Were stocks cheap? Well, no. But this one mea­sure of val­u­a­tion had hit a one-year low at a time when an­a­lysts were still op­ti­mistic about profit growth, which sug­gested that stocks were at least rea­son­ably priced.

This week, the trail­ing P/E ra­tio for the S&P 500 fell to 19.9 – its first foray be­low 20 in nearly two years, ac­cord­ing to Bloomberg. To some in­vestors, this was a bar­gain not to be passed by.

Of course, no one knows whether to­day’s stock mar­ket will con­tinue to fol­low this year’s ear­lier dip and re­bound.

David Rosen­berg, chief econ­o­mist and strate­gist at Gluskin Sh­eff + As­so­ciates, of­fers the bear­ish case: He pointed out that most mar­ket troughs, go­ing back much fur­ther, see val­u­a­tions de­cline a lot more than they have this week, a greater per­cent­age of stocks trade be­low their 200-day mov­ing av­er­ages and read­ings of in­vestor sen­ti­ment turn very dark.

“The true ca­pit­u­la­tion signs are still not quite there, if the re­cent past can be re­lied upon as a yard­stick,” Mr. Rosen­berg said in a note.

Some in­vestors, though, are look­ing at a dif­fer­ent re­cent past.

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