Tuesday, July 19, 2016

July 18, 2016


John P. Hussman, Ph.D.
From a long-term and full-cycle perspective, the most reliable valuation measures we follow - those with the strongest correlation with actual subsequent stock market returns across history - are consistent with roughly zero S&P 500 nominal total returns on a 10-12 year horizon, and the likelihood of an interim market loss of about 40-55% over the completion of the current cycle.
As I noted last week, however, our near-term outlook is rather neutral, largely because enough trend-following components have improved (though our broadest measures of market internals have not) to keep us from pounding tables about immediate losses.
Even as we allow for further near-term speculation, 
I remain convinced that the S&P 500 is likely to be lower a decade from now than it is today.
Put simply, stocks will collapse over the completion of the present market cycle, even a zero-interest rate environment, because the combination of frantic yield-seeking speculation and weak prospects for economic growth has already established the most punitive and unattractive full-cycle return/risk tradeoff for stocks since 1929.
 
Shiller PE as of 7-15-16 is 26.90!


But there’s another problem. A world where short-term interest rates are compressed to zero is also a world where expected economic growth is likely to run several percent below historical norms. The narrow gap between low expected growth and no growth at all implies an elevated probability of intervening recessions and credit strains. 
The extreme level of equity valuations also implies an elevated potential for steep cyclical drawdowns. In this high-risk environment, investors should be demanding larger-than-normal risk premiums on equities versus the returns available on Treasury securities. Instead, current stock valuations imply 10-year expected returns that provide no compensation at all for the additional risk.
DYI Comments:  Further into John Hussman's article he mentions that stocks measured by a 20 day moving average at the top of its Bollinger band.  If you need to sell down shares to build cash this is good time to do it.  Further speculation and central bank buying can persist driving prices higher. However, at these valuation levels an investor is in greater fool territory.  Find a greater fool and dump off your high priced shares.

Below is DYI's model portfolio my weighted valuation formula (based on dividend yield) has "kick us out" of the market and rightfully so!  Valuation are insane and have been for a little more than two years.  I feel as if I'm the boy who cried wolf only for the townsmen to find no wolf.  To put simply just because the market hasn't collapsed doesn't mean it won't.  Poor returns are baked into the cake with 10 to 12 years average annual returns on a optimistic basis of 0% to 2%!

As we all know this is before all fee's, trading impact costs, taxes, and inflation.  The Federal Reserve is hell bent on delivering 2% inflation.  Monetary policy is a blunt instrument not the fine tuning that the Feds believe they can achieve.  So....Inflationary overshoot is highly probable taking place in the 2020's as this deflationary period plays itself out.  The most probable REAL returns for stocks held or purchased today, go to sleep like Rip Van Winkle awaking in 12 years - are LOSSES!  Around negative -2% to -4% REAL return.

While everyone else is losing their heads don't go losing yours!
 
 Updated Monthly

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 7/1/16

Active Allocation Bands (excluding cash) 0% to 60%
87% - Cash -Short Term Bond Index - VBIRX
13% -Gold- Precious Metals & Mining - VGPMX
 0% -Lt. Bonds- Long Term Bond Index - VBLTX
 0% -Stocks- Total Stock Market Index - VTSAX
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DYI 

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