David RosenbergFred Lum/The Globe and Mail
The stock market's rebound on Tuesday and Wednesday might come as a relief to investors who have feared a steeper correction. But David Rosenberg, chief economist and strategist at Gluskin Sheff, maintains that this dip might not be over just yet.
He noted that there have only been two other times when the stock market ran "parabolically" from a low point in little over a year, as the S&P 500 did between March 2009 and April 2010 (rising 80 per cent). In 1932, stocks surged 112 per cent. And in 1933, stocks rose 116 per cent.
"In the first case, we had a 40 per cent correction and in the second, the correction was 34 per cent," he said in a note to clients. "So, we are talking here about the prospect of a pretty hefty reversal in the S&P 500 that could very easily take the index down to as low as 850, if the history of these types of givebacks is any indication."
A correction of this magnitude would take the S&P 500 to a 13-month low, or just above its nadir in March 2009. On Wednesday in mid-morning trading, the S&P 500 was up 7 points or 0.7 per cent, to 1081. On Tuesday morning, it fell as low as 1040, or down nearly 15 per cent from its high in April.
Mr. Rosenberg doesn't base his bearish forecast on mere history, though. He believes that the equity market is pricing in U.S. economic growth of 3.5 per cent. However, the Economic Cycle Research Institute's leading economic index is pointing to growth of just 1.5 per cent in the second half of the year, which is a serious deceleration that the market hasn't priced in yet.
"The S&P 500 level that would be consistent with that sort of pace would be closer to 850 than the current level of 1,074 [on Wednesday morning]" he said. "In other words, there is still more air to come out of the balloon."