If, so that’s TSX 8600 – Its 11,450 now.

Rosenberg: Expect a 31 per cent correction

David Berman

David Rosenberg, chief economist and strategist at Gluskin Sheff, has taken his share of criticism for remaining bearish during the 14-month run-up in the stock market. On Thursday, though, we detected a little more confidence in his bearish tone.

With global stocks getting creamed, and investors scrambling to find satisfactory reasons for the decline, his views are certainly more relevant – and he comes up with one big reason that should give investors something to think about.

Sure, the global backdrop to the market isn’t good. Violence in Thailand. Talk of sanctions against Iran. Growing doubts over the euro zone bailout plan. Concerns about China’s economic growth.

But Mr. Rosenberg also points to a factor far closer to home: After a remarkably sharp rebound in stock prices, valuations are stretched. He uses so-called normalized price-to-earnings ratios – a technique made famous by Yale professor Robert Shiller – that averages earnings over 10 years to smooth out the bumps in the economic cycle.

Today’s normalized P/E ratio is 21 for the S&P 500. Over the past 130 years, whenever the ratio rises above 20.6, the stock market encounters a “significant correction” averaging 31 per cent over 16 months.

“It never fails,” Mr. Rosenberg said.