John Hussman: The Hook
February 2000 (S&P 1425)
“On Wall Street, urgent stupidity has one terminal symptom, and it is the belief that money is free. Investors have turned the market into the carnival, where everybody ‘knows’ that the new rides are the good rides, where the carnival barkers seem to hand out free money just for showing up. Unfortunately, this business is not that kind – it has always been true that in every pyramid, in every easy-money sure-thing, the first ones to get out are the only ones to get out.”
March 2000 (S&P 1400)
“We’ve seen a continuous movement from trough to peak, and investors appear all too willing to label it a New Economy. At current valuations, even optimistic assumptions lead to the conclusion that a long-term buy-and-hold approach will underperform Treasury bills during the next decade and perhaps beyond (using today as a starting point). Of course, stocks may offer excellent returns beginning from some future trough, but from current levels, investors are unlikely to enjoy much reward for the risk they are accepting. That’s a long-term statement. Unfortunately, long-term thinking means little to investors here… Bullish sentiment remains high. Our view is that the massive bubble in tech stocks is only beginning to burst. One of the hard lessons that investors will learn in the coming quarters is that technology stocks are actually cyclicals.”
John P. Hussman, Ph.D., Hussman Investment Research & Insight, August 2000 (S&P 1480)
We are in very familiar – if frustrating – terrain here. While valuations are not as extreme as they were in 2000, the level of investor confidence in “free money” is nearly identical, as is my conviction that this belief in free money will end in tears. Even on the optimistic assumption of 6.3% nominal economic growth for the indefinite future, we estimate a probable 10-year nominal total return on the S&P 500 averaging just 3.6% annually (see Investment, Speculation, Valuation and Tinker Bell for a set of historically accurate models that share that conclusion). Above, I’ve chosen quotations spanning several months in 2000 to emphasize the drawn-out nature of the 2000 peak – the seeming “resilience” of the market above the 1400 level certainly did not prevent the market from losing half of its value over the following 2-year period, wiping out the entire total return of the S&P 500 – in excess of Treasury bill returns – all the way back to May 1996.
Early 2003 provided a good opportunity to shift to a constructive view for a while. We gradually found ourselves back in a defensive stretch (see Critical Point in November 2007), which was followed by a market decline of more than 50%, which erased the entire preceding bull market gain in the S&P 500 index, and wiped out the entire total return of the index – in excess of Treasury bill returns – all the way back to June 1995.
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