Pushing Luck 

John P. Hussman, Ph.D.

Needless to say, there are endless arguments as to why this time is different, just as there were at each of those other peaks. The present, uncompleted half-cycle is being used to argue that historical full-cycle relationships no longer hold. It’s certainly true that quantitative easing has allowed the market to ignore even extreme variants of overvalued, overbought, overbullish conditions that have historically been resolved much more quickly. Similarly extreme conditions emerged in February and May of 2013 without consequence, and lesser variants have appeared sporadically for 2-3 years. There’s no question that the suspension of historical regularities in this uncompleted half-cycle has destroyed my credibility with those who don’t take historical evidence seriously in the first place – despite losing half of their assets in 2000-2002 and 2007-2009, and I expect will shortly do so again. Speculators have been luckier than they may realize, and are now pushing their luck. 

Still, nearly all of the current disputes about valuations, profit margins and so forth can be settled by an evaluation of the historical evidence. The unsettled arguments are the ones that require the present to depart from history against a century of evidence. There are two main beliefs here: that profit margins will remain elevated dramatically above norms that have been revisited in every cycle, including the two most recent ones; and that strenuously overvalued, overbought, overbullish conditions can be sustained indefinitely. These beliefs are identical to those in 2007 that we thought were settled by the 55% market plunge that followed. Investors have become speculators, and now rely on both, in the face of the same conditions that have repeatedly emerged at the most memorable market peaks in history.

DYI Comments:  Valuations today (Shiller PE10) stand at approximately 55% of the year 2000 top and 76% of 1929.  Between the two aforementioned speculative bubbles the market on average is 2/3 of those tops.  Where it gets interesting is the other market tops of significant preponderance.

1907 Jan ...20.10
1929 Sept..32.54
1937 Feb...22.23
1966 Jan ...24.06
1999 Dec...44.20
2007 May..27.54

January of 1907 and January of 1966 are significant SECULAR TOPS.  Today's market is now above both of them in terms of the Shiller PE10.  All in all, for the long term investor this is a lousy time to be holding or purchasing stocks of any significant amount.

DYI