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As equities return from one of their worst segments in years, a growing contingent of experts is on the horizon.
After all, the flirting between the S & P 500 and a bear market in December pushed stocks to more attractive levels. And given the Fed's recent monetary tightening surrender, it's easy to conclude that the path of least resistance is higher.
But bear John Hussman, a former economics professor and current president of the Hussman Investment Trust, mocks this idea. Although he acknowledges that the ratings have dropped, he says that they are still ridiculously high.
In fact, using a proprietary margin-adjusted proprietary price / earnings ratio measure, he finds that stock prices remain the most tight since the Great Depression. This can be seen in the table below.
"10% off the most obscene ratings in US history is not what I would call a" market ", wrote Hussman in a recent article on his blog. "In the current state of the markets, the valuations remain extreme and the internal resources of the market remain negative".
Read more: The legendary billionaire Ray Dalio told the crowd in Davos that the next economic crisis frightened him more than anything. Here is what he said and why he is so worried.
And as if those apparently bleeding estimates were not enough, Hussman said the Wall Street experts were giving investors false hopes by deciding what to do next. He laments the fact that they are so optimistic about earnings growth.
The disconnect that results from this situation stems from the fact that it is the same badysts who launch the expansion of profits as those who make the estimates. Hussman, meanwhile, said future earnings growth would be "probably lower than what we've seen in the last two decades."
"One of the most dubious characteristics of investment professionals 'behavior is the Wall Street badysts' show touting the" reasonableness "of valuations on the basis of expectations of expected earnings of $ 10 billion. 39, a year that they themselves are responsible for manufacturing, "Hussman said. .
"Just as in 2000 and 2007, instead of the investment profession playing the role of historically informed buffer to defend investors against reckless speculation, such extrapolated projections are actually endorsed and encouraged by those who should know it better. "
Read more: A top billionaire investment manager of the world's largest hedge fund explained to us why the economy was heading toward "20 years of ugliness," even though it avoided a major recession
Like all his incisive comments on the market, Hussman has a chart to back up his claim. The graph below represents the inverse of the above margin-corrected P / E chart (blue line) and superimposes a measure of the 12-year subsequent annual returns of the S & P 500 index ( Red line).
As you can see, the red line has followed the blue line closely over time, on a staggered basis. This suggests that the S & P 500 will have a long way to go in the next few years – which is very much in line with Hussman's Bear's thesis. This certainly does not correspond to the idea that profit growth will be a kind of savior of the market.
The road map of Hussman
For the uninitiated, Hussman has made headlines by predicting a stock market downturn of more than 60% and anticipating a full decade of negative equity returns. And as the stock market continued to climb for the most part, he persisted in his appeals without getting discouraged.
But before dismissing Hussman as an insightful foe, review his track record, which he breaks down in his latest blog post. Here are the arguments that he states:
- Expected in March 2000 that technology stocks would plummet by 83%, the Nasdaq 100 index, highly technology – driven, would lose 83% "of improbable accuracy" between 2000 and 2002.
- Expected in 2000 that the S & P 500 would likely have negative total returns over the next decade, which was not the case
- Scheduled in April 2007 that the S & P 500 could lose 40%, then 55% during the collapse from 2007 to 2009
In the end, the more Hussman discovers that the unsustainable conditions of the stock market are well known, the more investors should be worried. Of course, there may still be returns to be made in this market cycle, but at what point does the growing risk of a crash become too unbearable?
This is a question to which investors will have to answer themselves. And the one that Hussman will continue to explore in the meantime.
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