October 31, 2016
John P. Hussman, Ph.D.
My continued impression is that the global equity markets broadly peaked in the second-quarter of 2015, and that the more recent marginal U.S. highs in August were a “throwover” in response to the post-Brexit plunge in global interest rates.
High-yield credit is also rolling over, suggesting that the peak of yield-seeking speculation induced by central banks is probably behind us.
That’s not to say that central banks will refrain from further attempts to compress yields in response to economic shortfalls.
The problem is that even in a world where short-term rates remain compressed, the valuations and prospective long-term returns of risk-sensitive assets are already far outside the bounds that have historically delivered adequate risk-premiums.
DYI Quick Comment: To translate what the the professor is saying REAL (10 year time frame) returns for longer term duration bonds are in the neighborhood of 0% to negative 2%!
Investors will draw dangerously wrong lessons from the half-cycle advance since 2009 if they conclude that a) valuations don’t matter, or b) central bank easing is capable of preventing a market collapse once investor preferences shift toward risk-aversion.
The key lesson of the recent half-cycle advance was only that deranged central bank policies are capable of extending speculation, even in the face of “overvalued, overbought, overbullish” extremes, provided that investors remain inclined toward risk-seeking.
Investors are begging for trouble if they ignore the deterioration in market internals here, because we are observing a shift toward risk-aversion among investors at a point where the most reliable valuation measures we identify have been driven to some of the most obscene levels in history.
DYI: My model portfolio remains unchanged with zero percentage holdings in stocks or long term bonds. When I update using our weighted averaging formula tomorrow nothing will change as markets haven't change this month to any significant degree. The Great Wait Continues! Better values are ahead!
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