Bubble
News
March 13, 2017
John P. Hussman, Ph.D.
The late Sir John Templeton once said, “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” A week ago, bullish sentiment among investment advisors soared to the highest level in 30 years (Investor’s Intelligence), joined last week by a 16-year high in consumer confidence. When one recognizes that the prior peak in bullish sentiment corresponds to the 1987 market extreme, and the prior peak in consumer confidence corresponds to the 2000 bubble, Sir Templeton’s words take on both relevance and urgency. As I detailed last week, the most historically reliable valuation metrics have advanced within a few percent of their 2000 peaks, while the median valuation of S&P 500 components is now easily at the highest level on record (for charts and other analysis, see The Most Broadly Overvalued Moment in History).
Presently, we observe the broadest market valuation extreme in history, with the steepest median valuations on record, and the most reliable capitalization-weighted measures within a few percent of their 2000 peaks. In addition to extreme valuations, bullish sentiment, and consumer confidence, market action has deteriorated in interest-sensitive sectors, and internal dispersion has been widening more broadly. As of Friday, more than one-third of stocks are already below their 200-day moving averages. Indeed, even with the major indices near record highs, more NYSE-traded issues set new 52-week lows last week than new highs, while credit spreads abruptly widened.
I strongly believe that there is a mapping between reliable valuation measures and the subsequent market return/risk profile that investors can expect.
Yet even for investors who don’t believe that prospective market return/risk profiles can be estimated,
it is still important to allow for near-zero 10-12 year S&P 500 total returns
and a likely
interim loss
on the order of 50-60%.
To the extent that investors would not be capable of adhering to a passive discipline if these return/risk expectations prove accurate over the completion of this cycle (as they did after the 2000 and 2007 extremes), they are taking market exposures that are inconsistent with that discipline, as well as a century of market history.
For that reason, I encourage passive investors to align their exposures to the point where they would, in fact, have the capacity to maintain their discipline over time, should these expectations be realized.
DYI: DYI’s Ben Graham’s Corner my Earning Yield
Coverage Ratio is now screaming that stocks are no bargain as compared to long
term bonds.
Ben Graham's Corner
Margin of Safety!
Central Concept of Investment for the purchase of Common Stocks.
"The danger to investors lies in concentrating their purchases in the upper levels of the market..."
Stocks compared to bonds:
Earnings Yield Coverage Ratio - [EYC Ratio]
EYC Ratio = [ (1/PE10) x 100] x 1.1] / Bond Rate
1.75 plus: Safe for large lump sums & DCA
1.30 plus: Safe for DCA
1.29 or less: Mid-Point - Hold stocks and purchase bonds.
1.00 or less: Sell stocks - rebalance portfolio - Re-think stock/bond allocation.
Current EYC Ratio: 0.94
As of 3-12-17
Updated Monthly
Updated Monthly
PE10 as report by Multpl.com
Bond Rate is the rate as reported by
Vanguard Long-Term Investment-Grade Fund Investor Shares (VWESX)
DCA is Dollar Cost Averaging.
Lump Sum any amount greater than yearly salary.
PE10 .........29.23
Bond Rate...3.99%
Lump Sum any amount greater than yearly salary.
PE10 .........29.23
Bond Rate...3.99%
Over a ten-year period the typical excess of stock earnings power over bond interest may aggregate 4/3 of the price paid. This figure is sufficient to provide a very real margin of safety--which, under favorable conditions, will prevent or minimize a loss......If the purchases are made at the average level of the market over a span of years, the prices paid should carry with them assurance of an adequate margin of safety. The danger to investors lies in concentrating their purchases in the upper levels of the market.....
DYI: For those of you who have a fixed asset
allocation such as 60% stocks and 40% bonds will you are able to withstand 25%
to 35% decline? If not it is time to
reconsider your asset allocation. The
market has reached such high levels I’ve moved my U.S. stock sentiment indicator
back to Max-Optimism. Due to MASSIVE Fed
intervention stocks have achieved a DOUBLE SECULAR TOP!
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