5th Correction Now In 2014 - PE Expansion Could Get Harder Going Forward

Includes: SPY
by: Brian Gilmartin, CFA

Assuming that the Santa Claus rally started in earnest on December 17, we've just finished our 5th correction in the S&P 500 in 2014, which is a pretty strong "change of character" for the market since the March 2009 generational low for the S&P 500.

Here is the spreadsheet we use to track S&P 500 corrections: S&P 500 corrections

  • The retail investor hasn't seen a 20% correction since 2011.
  • We've now seen 5 of what I consider to be decent, pit-of-the-stomach-type corrections in 2014, which is a vastly different pattern than 2012, and 2013. 2013 we saw one correction of 7.50%.
  • Remembering, the late 1990s and the vicious corrections we saw in 1997, 1998, and then March of 2000, I am wondering if these little mini sell-offs aren't unlike tremors before a major earthquake.
  • I do think the next 20% correction isn't earning-related, but the Fed finally normalizing short-term interest rates. Taxable fixed income is getting harder and harder to find value - there are trillions of corporate credit money chasing nickels of spread.
  • Strictly an opinion, but I think it gets harder and harder for the S&P 500 to generate "PE expansion" and despite this rally into year-end 2014, I am growing more cautious on 2015.

I'm thinking now if we do 5%-10% in the S&P 500 next year, it would be a good year.

Very similar to 1994, however, I said the same thing in late 2013.

Our favorite sector for 2015 is still Financials, with current (or plan to be overweight) Industrials and Technology in 2015, as well.

This could also be the incoherent ramblings of an old man that simply writes to clarify his own muddled thinking.

Still, 2014 is now different than the stability of the last few years.

Readers should always be sensitive to a change of character in the S&P 500.