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T. Rowe Price: We’re Due for a Correction

T. Rowe Price: We’re Due for a Correction

2013 has been quite a year for the bulls. The markets shrugged off bad news, such as potential military action in Syria, the slowing of the Chinese economy, and the recent government shutdown. So far this year, the S&P 500 is up 26 percent. But according to the law of investment gravity, “What goes up at some point must come down,” said John Linehan, head of the U.S. equity division at T. Rowe Price.

Speaking at a T. Rowe Price press briefing this morning, Linehan said 2013 will be one of the few years in the post-war era that hasn’t had a correction of more than 5 percent. (Of course, the year’s not over yet.) The largest correction this year lasted from May 22 to July 24, and the S&P fell 4.97 percent.

“At some point in 2014, we’re probably due,” Linehan said.

Bill Stromberg, head of equity, said he wouldn’t be surprised to see a 10-20 percent non-recessionary correction next year. But that will likely signal a time to buy, Linehan said.

The current bull market is aging, Stromberg added. We’re 57 months into it (from March 9, 2009 through Nov. 19, 2013), and the stock market is up 164 percent. And that’s the average of all the historical bull markets going back to 1928.

There are also signs of speculation, he said. Margin debt—the amount people borrow to buy stocks or bonds—peaked in both the bull market tops of 2000 and 2007. Today’s margin debt has already outpaced those peaks, now at about $400 billion.

“There are signs of speculation that are appearing in little pockets out there. It’s not bubbles yet, but there are signs that we should be careful.”

The outlook wasn’t all bad. There are still strong corporate fundamentals, and the possibility for positive investment sentiment to continue, Linehan said.

Valuations have been fairly attractive on a historical basis, but they’re now getting to a more neutral level, Linehan said. During previous recoveries, markets typically go from cheap to fairly valued to somewhat expensive. Market performance has been very strong, taking some of the gains out of future years.

“We’re still not at that sign of exuberance, but I think it’s on the way.”

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