May 2, 2016
John P. Hussman, Ph.D.
Market conditions continue to be characterized by the likelihood of extremely poor long-term and full-cycle outcomes, with expected 10-12 year estimated S&P 500 nominal total returns in the 0-2% range, negative expected real returns on both horizons, and the continued likelihood of a 40-55% interim market loss over the completion of the current cycle; a decline that would represent only a typical run-of-the-mill cycle completion, based on valuation measures most tightly related with actual subsequent market returns across history.
The degree of second-guessing regarding historically reliable valuation measures is perplexing, given that there has been no deterioration whatsoever in the correlation between these measures and subsequent market returns on a 10-12 year horizon (see the recent comment, Permanently High Plateaus Have Poor Precedents, and note that these measures have been just as reliable in recent cycles as they have been for the better part of a century).
In sum, our immediate, near-term view is rather neutral here. Our cyclical view remains that the market continues to trace out the arc of a broad top-formation, and we would view a 50% market loss as a wholly run-of-the-mill outcome over the completion of the current market cycle. Marginal new highs in the market would not change those views any more than the marginal new high in October 2007 changed our expectations prior to the global financial crisis. Our long-term estimate of expected 10-12 year S&P 500 nominal total returns remains in the range of 0-2% annually, with negative expected real returns on both horizons. Those who are comfortable with these prospects and attendant risks, believing that zero interest rate policy “justifies” historically obscene valuations on highly reliable measures (and the dismal long-term outcomes these valuations imply, and have always implied across history), are certainly welcome to view current market valuations as “justified.” Hey, knock yourself out.DYI Comments: Totally agree with Professor Hussman the U.S. market is at obscene levels along with sub atomic low interest rates driving bond prices to the moon. A typical account lumped summed with 60% stocks and 40% bonds will have dismal returns over the next 12 to 15 years. Despite re-balancing over that course of time nominal total returns will be in 2% to 4% range. That of course is before all costs are factored in. Depending on the type of account, there will be taxes paid along the way(taxable account), trading impact costs, fee's and possible commissions plus inflation. If the Fed's achieve their stated objective of 2% inflation plus 1% for the other costs just mentioned then you can subtract out 3% achieving a negative -1% to positive 1% real returns. Dismal is an understatement for a 15 year holding period.
Below is a chart for Vanguard's Precious & Metals Mining Fund symbol VGPMX has bounced off it's bottom. It appears that gold and the mining companies are in a bull market. Time of course will be telling. What we do know is that despite this pop in prices mining company shares are still depressed far greater than the products they mine. There is value remaining.
Gold's high September 6, 2011 at $1921.50 and gold's low December 2, 2015 at 1054.50. Gold's current price $1285.
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