In this week’s market commentary, John Hussman extended his thesis that “the U.S. stock market has been characterized by an overvalued, overbought, over-bullish”. Based on historical events, he has sound some alarms for investors.
His own fund has suffered a couple of percentage in face of a rising market. But as you imagine, that is not going to deter someone who has his conviction.
There is something more constructive in this week’s commentary and I would like to highlight here. After much debate, Hussman came to the conclusion that Jeremy Grantham has been right about the high-quality US equity:
Read the full text of Hussman’s weekly market commentary here.
Check out Hussman’s stock portfolio by clicking on John Hussman.
His own fund has suffered a couple of percentage in face of a rising market. But as you imagine, that is not going to deter someone who has his conviction.
There is something more constructive in this week’s commentary and I would like to highlight here. After much debate, Hussman came to the conclusion that Jeremy Grantham has been right about the high-quality US equity:
From a stock selection perspective, it is striking how extended the stocks of cyclical companies have now become, relative to more stable companies. This is true both on the basis of price and valuation. Cyclical stocks include companies such as Alcoa, Citigroup, Caterpillar, CSX, DuPont, Deere, Ford, FedEx, Goodyear, Hewlett Packard, International Paper, Southwest Airlines, 3M, Sears, United Technologies, and Whirlpool, among others. Staples include companies like Abbott Labs, ADP, Colgate Palmolive, Disney, General Mills, Johnson and Johnson, Kimberly Clark, Coca-Cola, McDonalds, Merck, Pepsico, Pfizer, Safeway, Walgreens, and Wal-Mart, among others.
The following chart (courtesy of Bill Hester) presents the ratio of the cyclicals index (CYC) versus the staples index (CMR). It's notable that the most recent spike in this ratio coincided with Bernanke's initial announcement of QE2. Cyclicals are now nearly as overextended relative to staples as they were at the 2007 peak. As one would infer from the word "cyclical," these companies are unusually prone to volatility.
Just as relevant for investors is the comparative valuation of these groups. The chart below presents the ratio of price/book value for staples relative to cyclicals. Historically, staples have been awarded higher valuations due to their higher and more stable long-term returns on equity. While staples continue to have strong returns on equity, they are strikingly out of favor. On this note, we have to agree with Jeremy Grantham of GMO in observing that high-quality large-caps (and we would emphasize those with stable growth, profit margins and ROE) most likely present the best prospects for total returns in the coming years. These stocks represent a distinct subset of the S&P 500. The constituents of the S&P 500 should not be viewed as a uniform group of "high quality" companies by any means.
Read the full text of Hussman’s weekly market commentary here.
Check out Hussman’s stock portfolio by clicking on John Hussman.
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