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Geoff Gannon
Geoff Gannon

Why Does John Hussman Think the S&P 500 Will Return 3.6% a Year From 2011-2020?

December 23, 2010
John Hussman is often called a perma-bear. Hussman’s been bearish on U.S. stocks from 2000 through today with the exception of one brief, shining moment in early 2009 when the crash of 2008 left stocks priced to return 10% a year for the next 10 years.

That was Hussman’s take then.

What’s his take now?

Hussman was expecting returns of 10% a year for the next 10 years back in early 2009. Now, he’s expecting 3.6% a year for the next 10 years.

Why the change of heart?


Stock prices were low in early 2009. They’re high today.

Here I have to come clean and say that if John Hussman is a perma-bear – I’m a perma-bear. I’ve been bearish on the stock market at the same times as Hussman for the same reasons. I just don’t write about the market. That’s not my job. I pick stocks.

Hussman picks stocks too. But that’s only a small part of what he does. If you look at John’s funds – especially Hussman Strategic Growth – you’ll see that he’s only looking to add a little relative outperformance with his stock picks. He’s really picking above average stocks while shorting the average stock – the S&P 500 – and thereby staying a stock picker while staying hedged.

John is not trying to pick stocks both long and short like David Einhorn.

What Hussman does is genius. It’s very simple. And it’s very effective. Hussman Strategic Growth is the mutual fund I always recommend. If you’re looking for a mutual fund, go with Hussman Strategic growth. It will do well differently than you would on your own. What more do you want from a mutual fund?

So, yes, I think Hussman Strategic Growth is a wonder of the investing world and anyone who isn’t picking their own stocks should be invested with John.

Even though he’s a perma-bear?

Actually, I don’t think John Hussman is a perma-bear. At least not as an investor. As a commentator, well…

Yes, I think that’s where John Hussman gets his perma-bear name.

Hussman writes a weekly market commentary. And he doesn’t just stick to commenting on market valuation. This column is where John’s bearish reputation comes from. It’s one thing to be hedged. It’s another to give specific reasons for being hedged.

I should point out that none of this should matter to investors in Hussman’s funds. If you look at what he does in those funds – market valuations, not Hussman’s politics – determine how he hedges. The rest of the returns come from picking specific securities. That part is the same as any other mutual fund.

I think Hussman is right to hedge. And I think people are wrong to call him a perma-bear. The truth is that stock market valuation undulation takes a long, long time. Sometimes it’s 15 years. Sometimes it’s longer.

Looking back – we tend to compress time. As long as we’re not living through it the great bond bubble in 1946 looks really obvious. We forget that for 17 years it was insanity not to buy bonds. We forget that not that many people working in 1946 had also been working in 1929. And that 17 years of continuous pain and pleasure – pain in stocks, pleasure in bonds – can change a man.

History is dead. Today’s alive. Alive with limitless possibilities. Alive with uncertainties. Alive with chance.

But history was alive with those things too. We just forget that.

So we call it bearishness when someone says that today’s price is not in line with history. It’s an outlier. A peak. An aberration. Whatever. It’s not normal.

We think this must be a very simple minded bear. He’s not considering the nuance of today. The possibilities of tomorrow. He’s just looking at history.

We don’t argue with that part – the history part – because, frankly, we can’t.

We can’t look back at the full history of U.S. stocks and say that stocks look cheap today. They don’t. The numbers are clear.

But maybe there are other reasons for why we can still get the “normal” 8-10% a year we stock market investors are entitled to. Maybe the alternatives to stocks are worse. Maybe we’re about to undergo a period of economic expansion the likes of which the world has never known. Maybe long-term interest rates will go to zero and say there.

You can always justify today’s price by appealing to the future. There are infinite futures. You just have to pick the one that makes today’s price look good.

There’s only one past. So you’ll find that justifying today’s prices based on yesterday’s results – the Ben Graham approach – limits your possible conclusions enormously.

The John Hussman approach – which really is the Ben Graham approach – is pretty limited in what it can say about future returns. It looks to current prices and past performance and asks: “Is this normal? Over the course of history, how have investors who bought at prices like this done?”

The answer is badly. They’ve done badly. They’ve done 3.6% a year over 10 years. They’ve crawled along for a decade or more. They’ve lost a lot of years and made very little money.

And that’s probably what will happen to us. We’re not going to do 8% to 10% a year for the next 10 years. Anyone who thinks that is crazy.

I hate saying that, because I’ve found there’s no use talking to people about market valuations. They don’t like the idea that price is fate. They want to cheat fate. They want to believe the future depends more on a series of chances – exactly how each economy and business does – than on a single criterion like the price you buy in at.

And day-to-day they’re right. The market moves on a million little coin flips.

That’s because value is like gravity.

Value is the weakest of the fundamental forces in the stock investing universe. Just as I can use a tiny magnet in the palm of my hand to lift a pin off the earth – easily trouncing a planet worth of gravity – the littlest bit of news will move your portfolio up or down in the next hour or the next day.

But when we move away from the next hour and the next day, we start to notice that prices are being moved by nothing but value.

Over long-distances, stock prices are moved by nothing but value.

A long time ago, I wrote a post about 15-year average P/E ratios. When I started the study, I figured the high P/E low P/E effect would be noticeable over 15 years and 10 years maybe 5 years. I never thought it would work in 1 year.

But it does. By far the easiest way to predict what stocks will return next year is how highly priced they are compared to their “normal” earnings. Any long-term average will work.

High normalized P/E years do really, really badly. They have very few good outcomes. And they have a lot of bad outcomes. Conversely, despite what everyone seems to think, buying after a crash – if that crash knocked stocks to lows not seen in decades – works really well.

The fact that there had just been a worldwide financial panic in early 2009, didn’t change the much more important fact that stocks were cheap. And the fact that we’re in the midst of an economic recovery, interest rates are low, the printing presses are running, etc. doesn’t change the much more important fact that stocks are expensive.

Expensive stocks make bad investments.

That’s why John Hussman thinks the S&P 500 will return 3.6% a year from 2011-2020.

Because that’s what history tells him.

Of course, that doesn’t mean you should abstain from stocks in 2011. It just means you should abstain from expensive stocks.

Over long-distances, stock prices are moved by nothing but value. That means you can still buy stocks in expensive markets. You just have to find the few absolute values in a relatively expensive market.

About the author:

Geoff Gannon

Rating: 3.3/5 (24 votes)


AlbertaSunwapta - 6 years ago    Report SPAM
Fine. Then don't own the S&P500. Own a subset or a different set of companies altogether.

Or, view the 3.6% return possibility as an opportunity for eventual market disillusionment and sell offs along the way that will greatly improve the return.

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