By Rodrigo Campos
NEW YORK (Reuters) - For all of those waiting for a correction in U.S. stocks, here's the news: you may have already missed it.
It is true that the broad S&P 500 has not gone through a by-the-book 10 percent decline since October of 2011. But seven of the 10 S&P 500 industry groups, the Nasdaq Composite (.IXIC) and the small-cap Russell 2000 (.RUT) have all fallen more than 10 percent at some point since, many more than once.
"One of the things that has kept the rally going is that it has had rolling corrections along the way," said Jim Paulsen, chief investment officer at Wells Capital Management in Minneapolis.
"It's not a surging market that really runs hard and needs to be shocked. It’s been sort of self-correcting."
The market's surge, with the S&P pushing through 2,000 for the first time in history, has raised concerns among many analysts about the run in equities, but several factors have kept corrections brief and should limit subsequent downswings.
While stocks are arguably not cheap on a price-to-earnings basis, few are alarmingly expensive. In fact, the bond market looks pricier - so investors that in the past would have switched to fixed-income are instead shifting funds around among equity-market sectors.
In addition, professionals chasing performance - hedge funds are lagging the S&P badly this year - along with flows from mutual funds and overseas investors lured by the relative appeal of U.S. assets, have been steadily pumping money into stocks.
SHALLOW, QUICK PULLBACKS
As a result, analysts expect more of the same: modest dips of 4 to 6 percent that quickly attract buyers due to performance-chasing or because of relative valuation. That could keep pullbacks shallow.
In the last 52 weeks alone, eight of the 10 major S&P sectors have retreated more than 4 percent at least three times each. Nine sectors - all except technology - have had at least a 6.9 percent drop.
During that same period, the S&P 500 has pulled back more than 4 percent only twice. In the past six months, the two steepest retracements in the benchmark were both shy of 4 percent.
"Investors have had plenty of opportunities to take some profits, and they have," said Doug Foreman, chief investment officer at Kayne Anderson Rudnick Investment Management in Los Angeles. "But the reality is these businesses continue to grow."
Earnings per share on the whole S&P 500 are expected to hit a record at just above $118 for this year and climb above $133 in 2015, according to Thomson Reuters data. From a forward 12-month perspective, the price-to-earnings ratio was 15.8, according to the data, just above the historic average of 14.9.
"We live in a relative world, so part of it is that in any moderate give-back people who were sitting with some liquidity earning next to zero will put it right back in the market," said David Rosenberg, chief economist and strategist at Gluskin Sheff in Toronto.
The major sectors have taken turns leading the market in the past year. Four of the 10 peaked between June and July, while the other six did so earlier this month, around the time the S&P 500 posted the most recent in a string of record closing highs.
The earnings yield on the S&P 500 was roughly 6.3 percent on Monday, a 3.71 percentage point premium over the 2.59 percent yield on the 10-year Treasury note, well above the long-term spread between the two of about 1.5 percentage points.
When compared to junk bonds, where the average yield to maturity is now also 6.3 percent according to Bank of America/Merrill Lynch data, stocks still do better given the historical junk yield is 9.4 percent - suggesting those bonds are now overpriced.
LACK OF ALTERNATIVES FOR CATCHING UP
A notable group among those lagging the benchmark S&P 500 are hedge funds. Hedge Fund Research data shows they returned 4.1 percent in the first eight months of the year compared to a 9.9 percent return for the S&P 500.
"The hedge fund community has been very conservatively invested for much of this cycle," said Phil Orlando, chief equity strategist at Federated Investors. He said now hedge funds were helping keep pullbacks small as they jumped into stocks after the smallest decline in fear of missing the next leg up and widening their performance gap.
Support from the U.S. Federal Reserve in the form of more than a trillion dollars in monetary stimulus is often cited as the main reason for the strength in the current bull market.
"The combination of pressure to perform from the pay to play crowd, i.e. professional money managers, and the Fed, is the reason why the market has behaved as it has," said Bill Fleckenstein, president at Fleckenstein Capital Inc in Seattle, a short-seller who closed his short fund around the time the market bottomed in 2009.
By buying bonds and keeping interest rates low, the Fed has pushed yield seekers into riskier assets. That, some say, has also contributed to the prolonged stock market strength even in the face of uncertain world events in Middle East and Ukraine.
In fact, the crisis in eastern Europe has dented appetite for European equities and is another reason why investors stick with the U.S. market.
"The places for people to put money as an alternative are extremely limited," said Rick Meckler, president of investment firm LibertyView Capital Management in Jersey City, New Jersey.
"That doesn't lead them to pull money out of this market and go anywhere else," he said.
(Reporting by Rodrigo Campos; editing by Tomasz Janowski and David Gaffen)