The collapse of major bubbles is often preceded by the collapse of smaller bubbles representing ‘fringe’ speculations. Those early wipeouts are canaries in the coalmine. John Hussman

The Great Wait Continues…. 

The Arithmetic of Risk

John P. Hussman, Ph.D.
President, Hussman Investment Trust

March 2018

Specifically, log(MarketCap/GVA) has a correlation of about -0.93 with subsequent 12-year S&P 500 total returns. The correlation is negative because higher valuations imply lower subsequent market returns. Recently, this ratio climbed to the highest level in history, exceeding the peaks observed in 2000 and 2007. Based on other reliable measures for which historical data is available, present market valuations also exceed those observed at the 1929 peak.

The most reliable measures of valuation we identify are now between 2.6 and 3.0 times their pre-bubble historical norms. No market cycle in history, not even in recent decades, has ended without bringing those measures within 20-40% of those norms (and usually below them). This implies that even a run-of-the-mill completion to the present market cycle can be expected to take the S&P 500 between 45% and 65% lower, even without breaking below historical valuation norms. Likewise, I fully expect that even after dividends, the total return of the S&P 500 over the coming 12-year period will be negative.

“By the completion of this market cycle, I doubt that there will be much talk of the ‘cost’ of getting out too early. The 2000-2002 collapse wiped out the entire total return of the S&P 500 – in excess of Treasury bill returns – all the way back to May 1996. 

The 2007-2009 collapse wiped out the entire total return of the S&P 500 – in excess of Treasury bill returns – all the way back to June 1995. We correctly anticipated the extent of both collapses. 

Frankly, I expect that the completion of the current cycle will wipe out the entire total return of the S&P 500 – in excess of Treasury bills – all the way back to roughly October 1997. 

That outcome would not even require our most reliable measures of valuation to revisit their historical norms. 

If there is something in the financial markets to be particularly optimistic about, it is the prospect of opportunities that will evolve over the completion of the current market cycle. 

The strongest expected market return/risk classifications we identify emerge when a material retreat in valuations is joined by an improvement in market action.” 

DYI: U.S. stock market is massively overvalued by any measure you care to use whether it is sales, earnings or dividends the results are the same: VALUATION MASS INSANITY!

This mass insanity is coalescing around endless wars, unaccounted tax dollars [21 Trillion past 20 years], fake as hell mass shootings, insane politics [Democrat or Republican] along with a psychosis level of propaganda delivered by the main stream media.  This is all reaching a peak level and when the apex arrives a biblical proportion stock/bond market and economic blow off will occur.  God help us! 

DYI