MW: U.S. stock prices point to possibility of extended correction

U.S. stock prices point to possibility of extended correction

By Kate Gibson, MarketWatch

NEW YORK (MarketWatch) -- Equity valuations point to further consolidation or even an extended correction for the U.S. stock market, among other indicators, some analysts say.

The usual matrixes for determining the value of what investors are paying for stocks should be put in context, given "this isn't a normal environment for valuations," said Ed Clissold, senior global analyst at Ned Davis Research.

But Clissold believes stock valuations are at or near their ceiling, at least if one puts them in context of the last half a dozen or so years.

Yale economist Robert Shiller looks at 10-year average earnings adjusted for inflation, which Clissold views as a reasonable approach. His firm uses a similar concept, which involves looking at the median price-to-earnings ratio of the S&P 500 Index (INDEX:SPX) .

The price-to-earnings ratio for equities is about 22, putting it about one standard deviation above its long-term average, based on numbers running back to 1968, Clissold said. "Over the past seven years, the median P/E has struggled to get above the 22 to 24 range, so there is that valuation ceiling out there and we're getting close to it," he added.
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The strategist also believes the market's near-uninterrupted 70% rise from March 2009 lows leaves it vulnerable to a correction -- especially given that in the last 10 months, there hasn't been one of as much as 10%.

"Usually when you go for this extended period of time, we would have had a correction," said Fitzpatrick, who calls it healthy for the market.

Just how extended that correction might be comes down to factors including China, as well as what corporations have to say about earnings and sales growth ahead.

"With the consumer strapped with debt and unable to borrow like in the past, consumption will be less than at the beginning of other economic expansions," said Clissold at Ned Davis.