Thursday, April 25, 2013

The Coming Correction?

I went to hear Tim Hayes, Chief Global Investment Strategist for Ned Davis Research (NDR), this morning.

I have written about Tim and his work several times on Random Glenings, so it goes without saying that I am a big fan of his work. Tim has following the markets for NDR since 1986.

Like many analysts*, Tim believes that the stock market is due for a correction. He presented a table which looked at stock market moves since 1928. 

On average, markets typically decline -5% every 49 days, and -10% roughly twice a year.  However, the stock market has moved almost steadily higher for almost 100 straight market days, making it one of the longest "up" moves in the last few decades.

That said, unless something dramatically changes in the macro economic environment, Tim would view any significant market corrections as a buying opportunity.

While it might still be too early to say that we are in early stages of a new secular (as opposed to cyclical) bull market, Tim noted that the market action over the past four years are consistent with the patterns seen in prior bull runs.

One of the major themes of Tim's work is, in my words, "reversion to the mean". Bonds have dramatically outperformed stocks since 2000, and history would suggest that stocks should outperform bonds for the coming years. 

Tim is not necessarily bearish on bonds - NDR believes that interest rates will remain at relatively low levels for at least a couple of years more - but he thinks that the total return of stocks will be higher than bonds in the years ahead.

*unfortunately, as Merrill Lynch analyst Stephen Suttmeier wrote earlier this week, 36% of the newsletters surveyed by Investors Intelligence are expecting a correction. From a contrarian standpoint, when a large part of the analyst community is expecting a correction it tends not to happen, at least based on history. This may explain why the market continues to rally in face of disappointing earnings results from many major companies.