John P. Hussman, Ph.D.
Last week, the most historically reliable equity valuation measures we identify (having correlations of over 90% with actual subsequent 10-12 year S&P 500 total returns) advanced to more than double their reliable historical norms. When valuations have been near those historical norms, the S&P 500 has generally followed with average nominal total returns of about 10% annually. In contrast, current valuations are associated with expected 10-12 year total returns of about zero, with negative expected returns on both horizons after inflation.
Now, in the context of low interest rates, some investors may view the prospect of zero total returns on stocks over the coming decade as reasonable and competitive. That’s fine, but understand that through most of the period prior to the 1960’s, interest rates regularly visited levels similar to the present, yet these same measures of stock valuations typically resided at well below half of present levels. In my view, investors who view current valuations as “justified relative to interest rates” are really saying that a decade of zero total returns on stocks is perfectly adequate compensation for the risk of a 45-55% market loss over the completion of the current market cycle - a decline that would historically be merely run-of-the-mill given current valuations, and that certainly cannot be precluded by appealing to low interest rates.
As I emphasize nearly every week, the immediacy of both our market and economic concerns would be reduced in the event that market internals were to improve materially on our measures. Over the past month, we’ve observed what appears to be a typical “fast, furious, prone-to-failure” rebound from oversold levels, but not a shift that would allow us to infer a return to risk-seeking preferences among investors. That may change, and we’ll take the evidence as it arrives. Barring such a shift, I continue to believe that both vertical market losses and an imminent U.S. recession should be viewed as significant and probable risks.
Stocks and corporate bonds(especially junk bonds) are heavily correlated to prosperity take that away and prices come tumbling down. With valuations being so high DYI anticipates a tumble of 45% to 60% and as John Hussman states: "A run of the mill decline!"
Stocks almost hit 2.5 times standard deviation from its mean...Wow! Not as high as the year 2000 but as high as 1929(not shown on chart). Don't be surprised at the bottom of this cycle stocks bought(or held) since the top year 2000 will have negative returns. Assuming a best guess stocks bottom year 2017 negative returns for 18 years. Hummm sounds a bit Japanese. Depending on how low this cycle goes it may(most likely) take an addition full market cycle before the market completely mean inverts.
Current Shiller PE Ratio(3-7-16) 25.30
DYI's weighted averaging formula will begin buying once valuation become more favorable and increase proportionally greater as valuation go below their mean. Most of the purchases will come from our gold mining shares commitment as they are propelled upwards as central banks around the globe attempt to reflate. This will leave the bulk of our short term bond fund for when stocks become very favorable long term. All of this will be "picked up" by DYI's averaging formulas. Their not a secret, all you have to do is click onto the pages marked stocks, bonds, gold. Simply put DYI is slowly moving into - or out of - our three asset categories based upon long term(since 1871) valuations.
Updated Monthly
AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 3/1/16
DYI
No comments:
Post a Comment