John P. Hussman, Ph.D.
Last week’s advance had the earmarks of a short-squeeze, featuring a low-volume advance to marginal new highs on a number of indices including the S&P 500, on hopes that a Greek bailout and a firming in oil prices will put a floor under global economic deterioration. On factors that affect our estimate of the market return/risk profile, credit spreads remain broadly wider than they were a few months ago, and our primary measures of market internals remain unfavorable. Meanwhile, equity valuations – on the most historically reliable measures we identify – are now fully 117% above their pre-bubble norms, on average. As of Friday, our estimate of prospective 10-year S&P 500 annual nominal total returns has declined to just 1.4%, suggesting that even the dismal 2% yield-to-maturity on 10-year bonds is likely to outperform equities in the decade ahead.
The upshot is that equities are likely to produce total returns close to zero over the coming decade. But they still present something of an “inventory” problem. The basic inventory problem is to accumulate inventory prior to advances in price, to hold that inventory as long as it appreciates in price, and to release that inventory when prices are elevated. What we observe at present is a market where the inventory now fetches record prices and is likely to enjoy little return for long-term holders, and suffer severe losses over the completion of the present cycle. But should short-term demand become even greater, one can’t rule out a move to even higher prices and even more dismal long-term prospective returns – something to be celebrated by those who hold out long enough to sell at that point, but tragic for those who actually buy the inventory in the hope that it will be rewarding over time.
Suffice it to say that current equity markets are no place for long-term investors, and that even a resumption of risk-seeking investor preferences would demand a considerable safety net. For now, we believe the best interpretation of recent market action is as a hopeful, low-volume short-squeeze to marginal new highs, despite early deterioration in market internals following a period of extreme overvalued, overbought, overbullish conditions. This pattern is much like we observed in September 2000 and October 2007. Still, we can’t rule out a more durable resumption in risk-seeking preferences, which we’ll infer from market internals and other factors, and we’ll take fresh evidence as it arrives in any event.DYI Comments: Completely agree with Professor Hussman DYI's aggressive portfolio remains the same, very defensive.
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