DYI Opinion: When the bubble pops expect a multi-year, multi-cycle collapse of 65% to 80%!

 

Ben Graham wrote: 

“In the short run, the market is a voting machine, but in the long run, it is a weighing machine.”

I expect we’ll see market losses, both in the S&P 500 and in the technology sector, on the order of -50% to -70% over the completion of this cycle.

John P. Hussman

We’ve seen the future. Again and again. Market valuations have reached similar extremes twice before in the U.S. financial markets – in 2000 and 1929 – along with lesser extremes in 2007 and 1972, and sector-specific extremes like the “-onics -tronics” boom ending in 1970. These, joined by numerous speculative episodes across other countries and other markets tell us how the bubble will end.

The defining feature of every bubble is the same: a growing inconsistency between the long-term returns that investors expect in their heads – based on extrapolation of the past, and the long-term returns that properly relate prices to likely future cash flows – based on valuations. Every bubble smuggles the same tragic past into the same tragic future by packaging it with new wrinkles that convince investors that “this time is different.” Ultimately, they still end the same way.

We presently observe this dynamic in the form of record price/revenue multiples for technology companies with progressively slowing growth rates, including AAPL, which sports a price/revenue multiple of nearly 10 – about three times its 2010-2020 norm – despite 3-year revenue growth of just 2% annually. One has to lean very hard into the idea of ever-rising profit margins in order to make the cash flow arithmetic work. We see the same dynamic writ large across valuations in the S&P 500 information technology sector. This is another way that a bubble manipulates time, and it’s a red flag.

On the topic of “passive investing,” I fully agree with the idea that investors are presently insensitive to valuations, and that this insensitivity has an impact on stock prices. My main disagreement with the “money flow” argument is that, in my view, the resulting bubble is a reflection of fragile and temporary speculative psychology rather than a robust and “mechanical” flow-based dynamic.

In my view, there’s nothing mechanical about this bubble apart from extrapolative speculative psychology. That psychology can shift in very short order. If history offers any lesson, it’s that a market collapse is nothing but risk-aversion meeting a market that’s not priced to tolerate risk. 

John P. Hussman