Waiting

For the Bear to Roar!

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

July 2024

There is no question that investors increasingly disregard valuations during speculative episodes, to the point where valuations are typically dismissed altogether by the peak of a bubble, in preference for passive, price-insensitive speculation (one dare not call it “investing.”) The unfortunate consequence is that market participants come to completely forget the arithmetic that links valuations, cash flows, and actual subsequent returns.

We know that while valuations are profoundly important in gauging likely long-term investment returns and the extent of potential losses over the complete market cycle, valuations can have very little impact on market outcomes over shorter segments of the market cycle. It’s when rich valuations are joined risk-aversion – as gauged by divergent or deteriorating market internals – that a “trap door” tends to open. The risk of falling through increases when one also observes a preponderance of overextended warning signals, as we’ve increasingly seen in recent months, accelerating to a fever pitch in recent weeks.

Put simply, based on a preponderance of long-term, intermediate-term, and short-term measures, current market conditions are singularly the most extreme that we have observed in the history of the U.S. financial markets. 

There is no assurance that the market is, in fact, at a peak. Only that current conditions are more consistent with a major peak than at any other point in history, including 1929, 2000, 2007, and 2022. It is a subtle distinction, but it’s important to distinguish observations from forecasts. 

My impression is that the U.S. stock market is forming the extended peak of the third great speculative bubble in history,

 but as usual, we’ll align our investment stance with observable conditions as they change. No forecasts are required.