John P. Hussman, Ph.D.
In my view, dismal market returns over the coming decade are baked in the cake as a result of extreme overvaluation at present. An improvement in market internals, however, would reduce the immediacy of our downside concerns. While a decision by the Federal Reserve to postpone the first interest rate hike might prompt a shift to more risk-seeking speculation, this outcome is not assured. The key indicator of risk-seeking would still be the behavior of market internals directly, not the words or behavior of the Fed. So we remain focused on market internals.
In any event, waiting to normalize monetary policy may defer, but cannot avoid, a market collapse that is already baked in the cake.
The Fed has only encouraged the completion of the current market cycle to begin from a more extreme peak. As we saw in 2000-2002 and again in 2007-2009, until and unless investors shift toward risk-seeking, as evidenced by the behavior of market internals, monetary easing may have little effect in slowing down a collapse.
Opinion: Stock market is doomed to rise only 3.5% a year over the next decade
It’s true that it would be particularly bearish if profit margins did contract, as I have discussed previously. But Grantham’s change of heart represents a Pyrrhic victory, at best, for the bulls: Even if profit margins remain at a permanently high plateau, the stock market is still destined to produce low-single-digit returns.
That’s because, without expanding profit margins, future earnings can grow no faster than sales — and sales growth is tied to an economy that is unable, even in the sixth year of a recovery, to produce real growth in excess of 2% annually. Even with dividends, it becomes difficult to see how the stock market can produce an inflation-adjusted growth rate of even 4% annually over the next decade.
The stock market could escape this mediocre fate if corporate profit margins were to widen further. And while anything is possible, it’s difficult to see how. The three major reasons economists have given for why margins expanded over the past decade are unlikely to continue.
Those reasons are 1.) falling interest rates, 2.) lower corporate tax rates 3.) a declining share of GDP going to worker compensation.
But interest rates over the next decade are likely to be higher than where they are today, not lower. And, given the dismal state of our government’s finances, which will worsen when interest rates rise, the pressure to increase taxes will be intense.
Nor does it seem even remotely likely that there will be a continued shrinking of the already reduced share of GDP going to worker salaries. If that were to happen, Arnott told me, “the backlash would be so widespread” that it would no longer be just “Occupy Wall Street” but “Occupy Main Street.”
1 out of 3 American workers support the rest of the country: Those not in the labor force surges to another record at 93,770,000.
The latest employment figures did not help the market. While the unemployment rate remained unchanged this is largely being driven by the massive number of Americans not in the labor force.
"This is the biggest employment story going on for a couple of years but is completely ignored by the media."
It is also conveniently ignored by the unemployment rate that only measures those “in the labor force” which is a very generous range. A large part of the not in the labor force group has come from people simply being unable to find work in this low wage economy.
"And then the media acts shocked that people like Trump and Bernie Sanders are gaining traction."
The media would like to continue to paint a Pollyanna case of the economy but that is just not the truth. We recently hit a record 93,770,000 Americans that are no longer in the labor force. 1 out of 3 Americans are not in the labor force while 1 out of 3 workers are supporting the rest of the country.
There is definitely something fishy going on with the growth in this category of employment. How is it feasible to be growing at a rate 3.5 times that of the population?
"In the end, the spin machinery will continue to go on trying to juice the stock markets higher despite none of the gains flowing down to your working class American."DYI Comments: The disconnect between the markets and general economics are now so large, this out of balance country will snap back to a state of equilibrium. Here at DYI I'm anticipating this high flying stock and bond market(especially junk bonds) to move down significantly in price over the coming months to reflect America's ACTUAL economic performance. A decline of 45% to 60% for stocks is well within the realm of reality.
My model portfolio remains steadfast. Very defensive as stock and bond prices are priced significantly above their historical averages.
AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 8/1/15
[See Disclaimer]
Dear Federal Reserve, politicians, and the Federal government in general:
You can fool the markets for some of the time but not all of the time. The old Chiffon margarine commercial regarding fooling mother nature. It will be the same for our stock and bond markets as well.
DYI
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