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Bubble

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As in all periods of speculation,

 men sought not to be persuaded by the reality of things 

but to find excuses for escaping into the new world of fantasy.

John Kenneth Galbraith, The Great Crash 1929, published 1954

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Fundamentally Unsound

John P. Hussman, Ph.D.

President, Hussman Investment Trust

July 2020

Saying that extreme stock market valuations are “justified” by low interest rates is like saying that poking yourself in the eye is “justified” by smashing your thumb with a hammer. 

Worse, by our estimates, the likely 10-year total return of the S&P 500 from current valuations is about -1.4% annually. 

Specifically, I continue to expect the S&P 500 to lose about two-thirds of its value. 

Even a 50% market retreat would bring valuations only to levels matching the 2002 low, which was the highest valuation level ever observed at the completion of a market cycle. 

Back to our $100 example. Suppose you buy the piece of paper for $68, and overnight, investors suddenly become willing to pay $100 for it. Well, instead of your 4% return occurring over 10 years, as you wait for your $100 payment, you’ll instead accrue an unexpectedly large return all at once. 

Of course, since the price is now $100, you’ll ultimately get nothing additional for continuing to hold. 

The sudden spike in the price has compressed your entire long-term expected return into an overnight windfall. Simultaneously, the new, higher valuation of $100 ensures that your future return will be zero.

DYI:  Stocks once again – [except for oil & gas plus precious metals mining companies] are “jacked up” with valuations sky high (see chart below) thus having future returns especially over the next ten years at best will be zero at worst after inflation negative 3% to 5% average annual return.  To understand this return envision yourself buying stocks (or holding stocks you previously bought) wholesale [Index fund, generalized stock etc.] going to sleep like Rip Van Winkle waking 10 years from now looking at your account only to see 0% or negative return.  Ouch!   

DYI:  When your 401k provider has their dog and pony show for employees they always stress investing for the long haul.  As the 30 year return chart below so aptly illustrates valuation whether high or low will alter your return significantly.  Today we are in an environment of massive overvaluation as 30 year returns for money invested today or previously bought waking in the year 2050 with a real return (after inflation) highly likely around 2%!  Ouch again!  So much for the grand retirement with Alpo served as the main course!  

 

DYI:  To be blunt with valuations sky high it is a terrible time to purchase stocks across the board such as an S&P 500 index fund or generalized manage stock fund so common in 401k’s.  Unless your providers have specialty funds [energy or precious metals mining] in your basket of fund choices you are far better off buying their short term bond funds.

The Great Wait Continues

DYI

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