EquityCompass: Correction of Sentiment or Something Worse?
- The S&P 500 is closing in on its first 10% market correction since turning higher from the bear lows 15 months ago (March 2009). Since 1928, there have been 92 instances of a 10% market correction or an average of 1 every 11 months.
- Two-thirds of the time, market pullbacks have presented good buying opportunities with market indices, on average, recovering from the decline two months later. With the benefit of hindsight, these corrections are referred to as sentiment-related and ascribed to investor expectations getting too far ahead of improving fundamentals.
- Bear markets have occurred, on average, every 4 years. Bear markets are declines of 20% or more and are accompanied by deterioration in fundamentals from a slowing, if not contracting, economy.
- The argument that the current correction is sentiment-related is that the enormous and extended increase in stock prices for the last 15 months without a correction has made them vulnerable to a pull back. In other words, the stock market was due for a correction with instability in Europe acting as the catalyst.
- Fundamentals, as represented by consensus analyst earnings estimates for the next 12 months, show no sign of deterioration. Forward earnings estimates for the S&P 500 have increased 13.5% since the beginning of the year and 7% in the last 45 days. The recent acceleration is a reflection of first quarter earnings reports that vastly exceeded prior estimates. The current consensus forecast for S&P 500 earnings in the next 12 months is about $88, up from $62 in April 2009, and reflects expectations of an improving economy.
- Bearish market watchers believe the current circumstances make past comparisons at this stage of recovery less reliable and that today’s uncertainties are larger obstacles to normal economic activity. How much of this view comes from anchoring to the experience of 2008, or prescient forecast of the future, is impossible to know. Historically, “double dip” economic recessions have been rare. What is far more common, however, is for the stock market to experience a 10% correction after an initial recovery.
- The memory of the 2008 bear market is exacerbating investors’ anxieties. We view the current market weakness as sentiment-related, and in the context of the past, an anticipated occurrence. What would change our view is evidence of fundamental deterioration, which has yet to emerge.
Richard E. Cripps, CFA
Chief Investment Officer
EquityCompass
Strategies
Richard E. Cripps is the Chief
Investment Officer and Senior Portfolio Manager of EquityCompass
Strategies, a research and investment advisory unit of Choice
Financial Partners, a wholly owned subsidiary of Stifel Financial
Corp. (SF-NYSE). Mr. Cripps joined Stifel Financial through the
acquisition of Legg Mason’s Capital Markets Group from Citigroup in
December 2005. Mr. Cripps directed the Portfolio Strategy Group of
Stifel Nicolaus Equity Research prior to his current role, where he
also served as a senior member of the investment committee with
responsibilities for equity market analysis and portfolio
strategy.
Important Disclosures
The information contained herein has been prepared from sources
believed to be reliable but is not guaranteed and is not a complete
summary or statement of all available data nor is it considered an
offer to buy or sell any securities referred to herein.
EquityCompass Strategies is a research and investment advisory unit
of Choice Financial Partners, Inc., a wholly owned subsidiary and
affiliated SEC registered investment adviser of Stifel Financial
Corp. Portfolios based on EquityCompass Strategies are available
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market index that tracks the performance of 500 stocks from major
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representative of the U.S. large capitalization market. Indices are
unmanaged, and it is not possible to invest directly in an index.
Past performance is no guarantee of future
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