Bubble News
March 27, 2017
John P. Hussman, Ph.D.
On the first day of March 2017, the combined market capitalization of U.S. nonfinancial and financial stocks reached $34 trillion. Those trillions of dollars in paper wealth filter down to the investment statements of millions of investors, reflected in quotes on computer screens and blotches of ink on paper. Over the completion of the current market cycle, we estimate that roughly half of U.S. equity market capitalization - $17 trillion in paper wealth - will simply vanish. Nobody will “get” that wealth. It will simply disappear, like a game of musical chairs where players think they've won by finding chairs as the music stops, and suddenly feel them dissolving as if they had never existed in the first place.
Stocks are a claim on a stream of future cash flows that will be delivered to investors over time. Historically, the most reliable “sufficient statistic” for those cash flows for the U.S. stock market as a whole is not next year’s forecast of S&P 500 operating earnings, but instead, the gross value added produced by U.S. corporations. The comparative reliability is not even close.
The next few years are likely to be difficult for those investors who cannot actually tolerate a 50-60% portfolio loss on passive equity investments.
Investors who would not be able to maintain a disciplined passive investment strategy over the course of such a loss are encouraged to review their investment exposure based on their actual investment horizon and risk-tolerance.
DYI
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