John P. Hussman, Ph.D.
At present, we estimate prospective S&P 500 nominal total returns averaging just 1.4% annually over the coming 12 year horizon, with the likelihood of an interim 40-55% market collapse over the completion of the current cycle. It’s tempting to believe that the continued suppression of interest rates will prevent any normalization of valuations “this time.”
But when one examines a century of market evidence, it turns out that the completion of every single market cycle in history has brought valuations to the point where prospective returns increased to the 8-10% range or higher. That’s true even of cycles where interest rates were quite low. Indeed, the level of interest rates at any point in time exerts a minuscule effect on the level of valuations observed even a few years later.
This is the same argument I made at the market peak in 2000, and again in 2007. While my concerns may have been the subject of debate at the time, the dismissive argument that “profit margins are fine, valuations should be higher, and stocks are going up” was settled by the steepest market plunge since the Great Depression.
The fact that those losses have been stick-saved by creating the third speculative bubble since 2000 doesn’t mean that these concerns can be dismissed.
No, it means that the spectacular collapse of yet another bubble is going to be replayed over the completion of the current cycle.
DYI Comment: My model portfolio speaks for itself:
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