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inside the market

If the market turbulence of the past month is rattling you, the longer-term outlook for stocks isn't going to provide much comfort.

The S&P 500 fell again on Wednesday, marking three straight down days. From its high in early September, the index has now tumbled 3.2 per cent.

The small-cap Russell 2000 Index looks even more battered: It has tumbled 10.2 per cent since July, hitting its lowest level since late 2013.

That puts the index into official correction territory, providing an ominous near-term threat to the broader market, which often takes its cues from small-cap stocks.

In Canada, the S&P/TSX composite index has fallen for eight of the past nine trading sessions, and it has slumped 5.4 per cent from its high in early September.

It is easy to dismiss the market jitters as noise – or exaggerated concerns about all sorts of fleeting issues, from geopolitical tensions and shifting U.S. monetary policies, to slower global economic growth and weak commodity prices – but some strategists are noting that the wider backdrop doesn't look much better.

Global asset manager GMO, based in Boston, has been been projecting weak returns for U.S. stocks for some time. In its most recent update on estimated seven-year returns, GMO estimated that U.S. large-cap stocks would deliver negative results over the next seven years, averaging minus 1.7 per cent a year after factoring in inflation.

Strategists at Pavilion Global Markets are only slightly more optimistic: They expect U.S. stocks will average minus 0.3 per cent a year over the next seven years (the average length of a business cycle over the past three decades), after inflation.

"This is consistent with our view that the U.S. economy still has at least another two years of expansion, which will support equities over the period," the Pavilion strategists said in a note on Wednesday. "However, this will be followed by another recession and bear market. A buy and hold strategy on stocks will not work from current levels."

They get their figure by combining falling valuations and profit margins with rising dividends and economic activity. The S&P 500 trades at 17.3 times reported earnings right now. To get back in line with the historical average of 14.4 times earnings, stocks would have to fall 2.6 per cent a year over the next seven years.

There are also profit margins to consider. Margins are very high right now, but have a tendency of reverting to the mean. A reversion would send stocks down 3.5 per cent a year, according to Pavilion's estimates.

Economic growth will help stocks. So will dividends, especially given that corporate payouts are low relative to profits, and therefore likely to rise. But these positive contributions won't be enough to offset the negative drags, making stocks a hard sell right now.

Canadian stocks don't look any better. Brian Belski, chief investment strategist at BMO Nesbitt Burns, lowered his year-end target on the S&P/TSX composite index to 14,500 – and believes the index could fall below that target in the near term – implying a further decline of more than 2 per cent from Wednesday's close.

"As we have stated many times before, Canadian equities are likely to be more susceptible to changes in sentiment around what is a choppy recovery in emerging markets and Europe, in our opinion," he said in a note. "In particular, sluggish emerging market growth and inconsistent commodity prices remain key obstacles to any prolonged outperformance of Canadian stocks."

He suggests that the solution to this ugly environment is to avoid the broader indexes and sharpen your stock-picking skills. He recommended Canadian financials (such as Canadian Imperial Bank of Commerce, Toronto-Dominon Bank and Manulife Financial Corp.) and industrials (such as Canadian Pacific Railway Ltd.).

But stock-picking has been challenging since this downturn began. More than 90 per cent of the stocks in the S&P 500 have fallen; the casualty rate within the S&P/TSX composite index is similar, at 88 per cent.

Right now, your odds of picking a winner are slim indeed.

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