2013 was a banner year for stocks, but 2014 has started off on a relatively sour note.
Markets are down so far this year, but that’s actually “helped re-establish more reasonable valuation metrics,” according to Gluskin Sheff’s David Rosenberg.
In a new note to clients, Rosenberg says clients should keep in mind “that after a year in which the S&P 500 outpaced earnings growth by a factor of four, we were due for a pause and for the economic and profits to play some catch-up to what Mr. Market had already priced in.”
Rosenberg outlines the nine reasons why we have seen a stock market correction this year. From his note:
- It had been 27 months since we have last seen a correction of any size (10% or more).
- The CBOE put/call ratio started 2014 at a nine-year low.
- The Investors Intelligence survey had breached 60% and the “spread” over bearish sentiment had exceeded 40 percentage points for eight consecutive weeks. That too happened in 1987, for the historians among us.
- The VIX index had declined to as low as 12x — it was a possible sign of complacency that few wanted insurance despite how cheap it was.
- Trailing P/E multiples (on diluted earnings) on the S&P 500 got as high as a four-year high of 18.6x at the start of the year (now down to 17x) — this was higher than 24 of the past 35 bull market peaks since 1900.
- The Shiller cyclically-adjusted P/E multiple, all criticisms of this metric notwithstanding, stood at 25.6x, and was higher than 29 of those prior 35 bull market highs of the past 113 years.
- What about that sub-2% dividend yield at the end of 2013? It did indeed still look attractive next to near-zero T-bill yield, but was only undercut by five other of the bull market peaks since 1,900 (it has risen almost 10bps so far this year).
- The S&P 500 price-sales ratio as 2.7x was also higher than all except five of the 28 bull market peaks since this series began 90 years ago.
- Finally, the Tobin Q (which compares replacement cost to book value) was higher than in 31 of the past 35 past market tops since the data was first compiled.
“So the big problem was sentiment and valuations, but both have started to move towards more attractive points,” Rosenberg writes. “Liquidity and economic growth remain the big-picture fundamentals that will once again render this brief corrective phase as another in the long list of buying opportunities we have seen for the past four-plus years.”
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