Here We Go
Again!
U.S. Stock
Market
Overvalued
Greater Than 1929!
Incubation Phase: Gradually and then Suddenly
John P. Hussman, Ph.D.
President, Hussman Investment Trust
June 2020
In the face of a breathtaking disconnect between Main Street and Wall Street, largely based on overconfidence in free money, my sense is that there remains a crisis ahead that will emerge “gradually and then suddenly.”
Part of the current enthusiasm of investors seems to be the idea that the stock market typically reaches its low before the economy does (though this was certainly not true of the 2001 recession). On the idea that the second quarter of 2020 will be the low point for the economy, there is a superficial sensibility in “looking over the valley.”
The problem is that post-recession bull markets typically begin at valuations about 40% of those we observe at present.
DYI: At 40% for today’s valuations the Dow Jones would be at 10,880! And yes I’m that bearish as Professor
Hussman. However to achieve this low
will take multiple of years – possibly as long as ten years - requiring two or
more cycles [not including this current cycle] before a secular bottom sets in. The 1970’s is very illustrative as the market
roller coasted from 1966 topping at Shiller PE 24 and then bottomed in 1982 at
7 Shiller PE!
Investors make the same mistake when they observe that the stock market essentially went nowhere between 1918 and 1920 despite the Spanish Flu pandemic, and then launched into a bull market that extended for nearly a decade. What this argument fails to observe is that market valuations between 1918 and 1920 stood at less than a quarter of current levels, representing the most steeply undervalued period in U.S. history.
DYI: Investors from 1917 until the launch of the roaring 20’s were able to purchase very high quality companies at 10% or more dividend yields. A person with money would have been shooting fish in a barrel as stocks were on the give-away-table!
So yes, if the U.S. stock market loses three-quarters of its value from current levels, I expect that stocks would become fairly resilient in response to additional negative developments, and would likely enjoy an extended bull market from those levels.
The S&P 500 has rebounded to within 6% of the most extreme level in U.S. history, to valuations that – on the measures we find best-correlated with actual subsequent market returns – again rival the 1929 and 2000 extremes. We currently project negative S&P 500 nominal total returns on both 10-year and 12-year horizons.
Our estimate of likely 12-year total returns on a conventional passive investment mix (60% S&P 500, 30% Treasury bonds, 10% Treasury bills) is now also negative, at -0.10%.
That’s lower than every historical extreme, including August 1929, except for the first three weeks of February 2020.
DYI: Below are two charts after inflation illustrating very painfully
what happens to investors returns when investing in grossly overvalued markets.
Updated Monthly
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