Bubble

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September 18, 2017

Eyes Wide Shut

John P. Hussman, Ph.D.

At the October 2002 market low, the S&P 500 stood -49.2% below its March 2000 peak (-48.0% including dividend income), with the Nasdaq 100 having lost more than -82.8% from its high, on the basis of both price and total return. The loss wiped out the entire total return of the S&P 500, in excess of Treasury bills, all the way back to May 1996. 

The bull market that followed would bring the S&P 500 to a fresh high by October 2007. Unfortunately, in the face of historically extreme valuations, that victory also proved temporary, and the S&P 500 collapsed by -56.8% (-55.2% including dividends) by March 2009, with the Nasdaq 100 losing -51.9% (-51.5% including dividends) in that decline. The loss wiped out the entire total return of the S&P 500, in excess of Treasury bills, all the way back to June 1995. 

It’s too easy to forget that by the low of the 2007-2009 collapse, the total return of the S&P 500 had lagged risk-free Treasury bills for nearly 14 years, all the way back to June 1995, and had outpaced Treasury bills by less than 1.2% annually over the nearly 22-year period since the 1987 high, even though early-2009 valuations reached only modestly undervalued levels based on the most historically reliable measures we identify. Having anticipated both the 2000-2002 and 2007-2009 collapses, with a constructive shift in-between, I remain convinced that investors are walking eyes-wide-shut into a similar outcome today. 

By the completion of the current market cycle, I expect that the S&P 500 will have lagged Treasury bills for the entire period since roughly October 1997.

DYI:  The Great Wait continues…Valuations are stretched to insane levels pushing future returns to sub atomic low levels and very possibly negative especially over the shorter term.  My model portfolio remains defensive as ever and the cash will be deployed only when valuations are more conducive to more reasonable future returns.  So hang onto your hats and your cash better values are ahead!

 Updated Monthly

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 9/1/17

Active Allocation Bands (excluding cash) 0% to 60%

78% - Cash -Short Term Bond Index - VBIRX

22% -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