Markets buck 10% ‘correction’ call

NEW YORK — Correction? What correction?

It's been 530 trading days, or more than two years, since the stock market suffered a 10% price drop.

But even though calls for a dip of 10%, the common definition of a "correction," are growing louder as stocks continue their record-setting 2013 run and investor optimism rises, there are plenty of reasons why this "correctionless" market can avoid a dreaded double-digit drop, bulls say.

The Standard & Poor's 500 stock index hasn't suffered a 10% dip since August 2011 (or 27 months ago), on its way to a full-fledged correction loss of 19.4%.

Corrections occur every 30 months, on average, says InvesTech Research. But there have been two recent stretches when the market went more than twice as long without a 10% drop, says Bespoke Investment Group.

The S&P 500 didn't tumble 10% even once in the last bull market, which lasted 1,153 days from March 2003 to October 2007. The longest correction-free run was 1,767 trading days from October 1990 to October 1997.

"The fact that someone hasn't had an auto accident for several years doesn't mean a car crash is imminent in their future," says Erik Davidson, deputy chief investment officer at Wells Fargo Private Bank. "Likewise, even though this stock rally seems long in the tooth, that's not in and of itself a reason for a correction to occur."

The lack of a meaningful market drop isn't unusual, especially when the normal triggers that spark selling are absent, says Carmine Grigoli, chief investment strategist at Mizuho Securities USA.

"Big corrections," he says, "occur when interest rates are rising sharply and the risk of recession is growing."

Neither of those conditions exist at the moment, as the nation's economy grew at a 2.8% clip in the third quarter, and the Federal Reserve is expected to keep short-term interest rates around 0% for the next year or two. Stock valuations, currently in line with historical averages, are not overly extended, either.

Michael Pento, president of Pento Portfolio Strategies, argues that a correction is unlikely, due to the Fed's easy-money policies.

"The Fed has ensured that the odds of a 10% correction are nearly the same as its overnight interbank lending rate: zero percent," says Pento, adding that any stock correction would be short-lived, as investors have few alternatives, given that cash and bonds yield so little.

Bill Hornbarger, an investment strategist at Moneta Group, says a "5% to 10% correction wouldn't surprise me if there was some bad earnings or economic news." But any correction is likely to be "muted" until the Fed makes it clear when it will tighten monetary policy, he adds.