By Carla Fried
John Linehan, head of U.S. Equities at asset manager T. Rowe Price (TROW) recently noted that we're on track for just the 10th calendar year since 1950 in which the S&P 500 did not experience at least one stretch where the index had a 5% price decline. (Though we did sure get close, as the late May-late June taper tantrum pushed the index down 4.97%. And, yes, we do have three more weeks to navigate before the calendar turns on 2013.)
Sam Stovall, chief equity strategist at S&P Capital IQ also recently sounded a similar theme. Since 1946 the median time between declines of at least 10% has been 12 months and the average 18 months. Today we're at month 26 and counting. But that doesn't make it a slam dunk that the end is nigh. From Stovall:
"Granted, there is no rule that states stocks must decline sharply every x-number of months. Indeed, six of these 31 declines in excess of 10% [since 1946] enjoyed between six and 60 months of additional bliss before slumping from exhaustion. Yet when the market did eventually decline, four of them slipped into new bear markets while two ended up as corrections. This limited sample implies that the longer the distance between declines, the deeper the subsequent sell off."
So far, investors aren't biting on that last part. The VIX index is still submerged at its lowest level since before the financial crisis.
But as T. Rowe Price's Linehan remarked at the firm's 2014 investment outlook, it's time to "proceed with caution." Since the last correction ended in early October 2011 the S&P 500's 60% gain has come on the back of PE ratio expansion, which is up 41%, while earnings growth grew just 13%. If you like your investing advice in metaphor, T. Rowe
