"The stock market is now much like Wile E. Coyote temporarily hovering just past the edge of a cliff." John Hussman of the Hussman Funds

January 9, 2017

The Economic Risk of Ignoring Arithmetic

John P. Hussman, Ph.D.

The stock market bubble that ended with the September 1929 peak began in August 1921, running just a few days beyond 8 years in duration. The bubble that ended with the March 2000 peak began in October 1990, running fully 9 years and 5 months in duration. Those two episodes represent the longest bull markets in U.S. history. The current half-cycle began at the March 2009 low, and has now run 7 years and 10 months in duration, making it the third-longest advance in history, placing it just 2 months short of the 1929 instance, but a full year and 7 months short of the 2000 instance. 

While we’re seeing persistent signs of dispersion, particularly across interest-sensitive sectors, my sense is that investors are mistaking the market gain in 2016 as a repudiation of the idea that extreme valuations, dispersion across market internals, and overextended conditions are of real concern. My own expectation is that even if there is a longer life to this bull market, the 2016 gain will be erased rather soon, in a quite ordinary late-stage correction, much like those that emerged with increasing frequency approaching other major market peaks. Our outlook will change with conditions, particularly with respect to valuations, market internals, and the presence or absence of overextended syndromes. For now, the stock market is now much like Wile E. Coyote temporarily hovering just past the edge of a cliff. The moment of descent isn’t clear, but I believe it would be a mistake to climb onto his shoulders.

DYI