NEW YORK ( ETF Expert) -- The S&P 500 has not experienced a 10% correction since Oct. 3, 2011. That's a heck of run without a reality check.
Yet, according to the researchers at Bespoke Investment Group, 515 trading sessions without a serious selloff is not unprecedented. The S&P 500 rocketed ahead throughout the 1990s (10/90-10/97) as well as in the 2000s (3/03-10/07) bull without a 10% price cut. The conclusion that many analysts are drawing from the data is that there is little reason to sweat the absence of a sanity-restoring setback.
Is there a problem with documenting occasions when markets pressed forward for multiple years without a hitch? Absolutely. For one thing, we're ignoring the number of occasions when markets did the opposite; that is, since 1928, the S&P 500 sold off by 10% in an overwhelming majority of years. Indeed, it is quite unusual for a 1990s- or 2000s-style campaign. Secondly, both of those campaigns ended with irrational exuberance giving way to -50% life-altering buzz cuts.
This is not to suggest that stocks will fail to grind higher in the intermediate term. They probably will. Ultra-slow employment gains coupled with U.S. political dysfunction ensure that the U.S.
will keep pumping greenbacks into the world's financial system. And let's face it, keeping yields low is the key to the revival of risk-on investing.
That said, should investors embrace history when the data are technical (i.e., number of trading days without a 10% correction), but ignore history when the data are fundamental? For example, European stocks typically trade at similar price-to-earnings ratios as U.S. counterparts. Right now, though,
SPDR Europe STOXX 50
is roughly 15% "cheaper" than
SPDR S&P 500
Vanguard All World
trades at an approximate 20% discount to SPY.
There are other "fun facts" from the fundamental file as well. Between 1940 and 1995, the S&P 500's price-to-revenue ratio did not surpass 1.5. The P/S ratio for the S&P 500 today stands at 1.6. Worse yet, sales growth at U.S. corporations in the benchmark averaged a meager 3% in the previous four quarters.
In the current environment where we have weak revenue growth -- in a historical framework where price-to-sales ratios are rarely this elevated -- perhaps it is more sensible to to consider international stock ETFs with lower P/S ratios.