In the three years since the market bottomed in March 2009, the S&P 500 has gained 103 percent. While a chart of the S&P 500 doesn’t form a perfect 45-degree angle–as usual, there have been plenty of jagged ups and downs along the way–this has been one of the strongest bull markets of the post-WWII era.

While I’m by no means a permabear, the strength of this bull run leaves me a bit disconcerted at this stage. Since the market’s rally began, we’ve suffered two significant corrections. The first correction began in April 2010 and finally ran its course the following July, with the S&P 500 having lost about 195 points. The second significant correction came last July, with the S&P giving up 222 points by the time it bottomed about a month later.

At this point, I’m expecting another correction in the near term. While the previous two downturns were largely sparked by external factors, such as the European sovereign-debt crisis, I suspect that first-quarter earnings will likely be the culprit this time around.

While there is no denying that the US economy has been steadily improving, as evidenced by positive data such as moderate gains in consumer spending, most Americans are still in deleveraging mode. As a result, many of the impressive earnings gains since the 2009 bottom can be largely attributed to cost cutting and greater productivity.

The chart above shows quarter-over-quarter productivity gains or losses. In particular, note the sharp decline in productivity since the second half of 2009. With labor costs accounting for about 70 percent of business expenses, falling productivity is a good indicator that profits are likely to be squeezed because employers are getting less output for the same cost.

One of the main ways a business responds to falling profits is by cutting costs, but companies have already pursued cost-cutting measures for the better part of four years now. The simple fact is that companies emerged from the Great Recession as relatively lean operations without much fat left to trim.

I’m not pointing this out because I expect another recession is in the offing. Short of a financial catastrophe in Europe, the global economy’s trajectory of slow and steady growth makes a recession unlikely. Rather, I suspect first quarter earnings are likely to be disappointing when compared to recent periods.

Even though most investors are well aware that it will be more difficult for companies to beat earnings expectations as the comparable periods from the downturn fade into the past, I still suspect the markets will likely react poorly to weakened earnings. So it could be a wise move to hold some cash in reserve and lighten up on more speculative bets until we get a sense of how profits are trending during the first earnings season of 2012.

What’s New

WisdomTree Emerging Markets Corporate Bond Fund (NSDQ: EMCB) broke new ground last week as the first actively managed emerging market debt exchange-traded fund (ETF).

The ETF focuses on dollar-denominated debt and its portfolio typically holds roughly 70 bonds from about 15 counties. Management aims to hold at least 65 percent of assets in investment-grade bonds with durations of between two years and 10 years. At present, the bonds in the portfolio have an average maturity of 7.85 years, and the portfolio should yield somewhere around 6 percent. The ETF charges a 0.60 percent annual expense ratio.

While there are emerging market bond ETFs that focus exclusively on sovereign bonds, this is the first ETF to hone in on emerging market corporate debt. The one potential drawback is the fact that its portfolio will only hold dollar-denominated issues; for many investors, currency diversification is a key component of emerging market investing that’s as important as the potential growth story.

Portfolio Roundup

Please see this month’s issue of Global ETF Profits.