Stock investors have reason to worry about a correction beyond the fact that the post-election rally has stalled and this bull market is an unusually long one. Now in its ninth year, this bull market has lasted longer than all but one since World War II. A correction is overdue, and the possible catalysts for one were discussed in a recent CFRA webcast, "Sell in May, or Will EPS Growth Save the Day?"
Stocks Are Expensive
The S&P 500 is trading at about 24 times trailing 12-month GAAP earnings, which is a 17% premium to the median P/E since 1988 and 42% premium since 1958, according to Sam Stovall, chief investment strategist for equity research at CFRA. The trailing P/E for operating earnings is 20 times, a 14% premium to the median since 1988.
(Related: The Bull Market Is 8 Years Old. What's Next?)
Even Federal Reserve policymakers are concerned about the stock market's valuation. Minutes their last FOMC meeting noted that "some participants viewed equity prices as quite high relative to standard valuation measures."
'Tis Almost the Season for Disappointment
The 100-day grace period for the new U.S. president, during which stocks rallied to record highs in early March, concludes at the end of April, just before the "sell in May and go away" market adage could become relevant.
Since World War II, the S&P 500 has gained an average 1.6% from May through October, compared to 6.7% from November through April, said Stovall, noting that the pattern applies also to small-cap U.S. stocks as well as emerging market indexes.
"Because we're looking at an old market … [and] at relatively expensive market, one mentally has to be prepared for the possibility" of slipping into a "challenging period," said Stovall. "Stocks to appear vulnerable."
What Happens in First Year of First-Term Republican Presidents
The May through October season can be particularly challenging during the first year of a first-term Republican president.
Since World War II, the S&P 500 has fallen 80% of the time during those months in the first year of a first-term Republican president, and the decline has averaged 4%, according to Stovall. (For a first-term Democrat during that season the S&P 500 has risen 83% of the time, posting an average 5.7% gain.)
These trends reverse during the November – April period. For a Republican first-term president stocks have risen 80% of the time, with an average 0.7% gain. For a Democratic first-term president the stock market has fallen 70% of the time, posting an average 3.3% loss but during the first year of a first-term Republican president, it has risen 80% of the time, with an average gain of 0.7%.
