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Calls for a market correction are getting louder by the day

The Dow Jones Industrial Average ended Monday’s trading with a 12th consecutive record high as the S&P/TSX composite index continues it own record streak.


The latest leg in the eight-year bull run in stocks has brought on a renewed rash of warnings over heightened valuations.

The Dow Jones Industrial Average ended Monday's trading with a 12th consecutive record high, matching the longest such streak first set in 1987. Meanwhile, the S&P/TSX composite index, despite a broad sell-off on Friday and a further 70-point drop on Monday, is on its own record run, on track to post a 13th consecutive positive monthly return on Tuesday.

The stock market's red-hot streak is "an unprecedented run warranting an equity downgrade," Canaccord Genuity's head of North American portfolio strategy, Martin Roberge, said in a recent note.

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For the first time since assuming his role nearly six years ago, Mr. Roberge recommended that investors reduce both U.S. and Canadian equity positions to underweight.

The recent inflation in trading multiples has also put David Rosenberg, chief economist with Gluskin Sheff + Associates, on the defensive when it comes to U.S. stocks.

"Correction is a certainty," Mr. Rosenberg wrote. "The question is only one of timing and magnitude."

As of Monday's close, the S&P 500 index has now gone 94 consecutive trading sessions without a 1-per-cent daily decline, while U.S. investors have been spared a 20-per-cent correction for the past eight years. Although the main Canadian benchmark did briefly dip into bear market territory early last year, it has since rallied by more than 30 per cent.

U.S. large caps are now trading in the top 20 per cent of historical average valuations, Mr. Rosenberg said.

"At current levels of valuation and complacency, and the long lag since the last corrective phase, to say we are overdue would be an understatement of historic proportions."

On the surface, U.S. stocks certainly don't look cheap, with the one-year forward earnings multiple on the S&P 500 at its highest level since 2004, Avery Shenfeld, chief economist at CIBC World Markets, said in note citing FactSet data.

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And that multiple already factors in a 10-per-cent increase in earnings in 2017.

"The only time one-year multiples were higher in recent memory was during the tech craze of the late 1990s, and that didn't end well," Mr. Shenfeld said.

And yet, fair value for stocks is a hazy concept when factoring in low interest rates, which make equities more attractive relative to low-yielding bonds.

Plus, the North American economic expansion appears intact, with no harbingers of recession readily apparent, Mr. Shenfeld said. The most common such culprit is the late stage of a monetary tightening cycle, which is a long way off from the current rate environment.

"None of this rules out a mid-cycle correction in North American equities, after such a generous run," Mr. Shenfeld said. "But it does suggest that should equities cheapen up, it would represent a buying opportunity rather than the end of the cyclical run in the market."

While Canaccord has turned cautious over multiples, it is also prepared to advocate opportunism in the event of a sell-off.

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"Our bias is to restore overweight equity positions once the market froth arising from the Trump rally has cleared," Mr. Roberge said.

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About the Author
Investing reporter

Tim Shufelt joined the Globe and Mail in August, 2013, primarily to cover investments for Report on Business. Prior to the Globe, he worked as a staff writer at Canadian Business magazine, a business reporter at the Financial Post, and covered city news and courts for the Ottawa Citizen. More


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