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John Hussman: We Should Already Have Learned How This Will End

April 01, 2013

Overvalued, overbought, overbullish. When in history have we seen the Shiller P/E (S&P 500 divided by the 10-year average of inflation-adjusted earnings) above 23, the S&P 500 over 60% above its 4-year low and 10% above its 52-week average, with investment advisory bears below 20% for at least two weeks running? Three times: the April 2010 peak, the March-May 2011 peak – both followed by corrections approaching 20% – and today. Even if one ignores the historical evidence suggesting the potential for significant bear market losses over the next couple of years, speculators should be aware that present conditions have been hostile even in the context of the recent bull market advance.

I use the word “speculators” intentionally, as the historical evidence overwhelmingly indicates that there is little in the way of “investment” merit at present valuations. See Investment, Speculation, Valuation, and Tinker Bell for a review of the simplistic “forward earnings” measures universally touted by Wall Street here, compared with a range of distinct valuation approaches (including a far more effective use of forward earnings), all which reach nearly identical conclusions, and all which have a dramatically stronger relationship with subsequent market returns at every horizon. Our present estimate of prospective 10-year S&P 500 nominal total returns is now down to about 3.5% annually.


So purely for exposition (again, this isn’t our working definition in practice), we’ll define overvalued, overbought, overbullish, rising-yield conditions as follows: Overvalued – Shiller P/E of 18; Overbought – S&P 500 at least 9% above its 12 month average, 50% above its 4-yr low, and at a 4 year high; Overbullish – Investors Intelligence bearish sentiment below 26%; Rising yields – 10-year Treasury yield higher than 6 months earlier. The historical points corresponding to these criteria are identified by the blue lines, with the S&P 500 Index (log scale) in red. Note that this particular set of criteria became active about 4 weeks ago, at about 1550 on the Index.


On a long-term chart like this, it’s easy to see that each instance – even 1964 – was ultimately followed by substantially lower market levels, and better investment opportunities for investors having a full-cycle investment perspective. What I want to emphasize here is how difficult investors would have found it to maintain a defensive discipline in real-time.

Notice that this set of criteria indicated an overvalued, overbought, overbullish, rising-yield condition in March 1964, at a level of about 80 on the S&P 500. Yet the S&P 500 advanced to 90 by May 1965, experienced a brief correction of less than 10%, and then advanced to 94 by February 1966, gaining about 20% over that two-year period. Put yourself in the shoes of investors at that optimistic market peak. Remember that they were yet to watch the S&P 500 quickly lose all of those gains, and then some, in the 1966 bear market, and would go on to discover that stocks would underperform Treasury bills for another 16 years.

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Rating: 3.1/5 (19 votes)


Skal401 premium member - 4 years ago

I agree and disagree with this article. Yes, the market appears overvalued and there is too much bullish sentiment. 1565-1600 on S&P 500 technically, represents very strong resistance and may take many months or even many years to successfully "break out" of. So I'm somewhat bearish.

However, cash and CD's are offerring such low returns and the bond market may have a difficult decade ahead. So with prospective small or negative returns from CASH and BONDS, perhaps its prudent to have a balanced portfolio of stocks, bonds and cash equivalents and maybe be somewhat "underweight" stocks to sleep better at night due to apparent increased risk.

Traderatwork - 4 years ago    Report SPAM
Check out the Shiller-PE at gurufocus.com


Compare the bull and bear market of the past and you'll come to a conclusion yourself. IMHO this guy have no idea what he is talking about.

Vgm - 4 years ago    Report SPAM
"John Hussman: We should already have learned how this will end"

Yes, John, we already have learned that it will probably end with your funds underperforming again - because you've spent all your time self-indulgently writing about the macro, and not nearly enough learning how to value companies on an individual bottom-up analysis.
AlbertaSunwapta - 4 years ago    Report SPAM
^ it depends on the game they are playing. Broadly diversified funds should look at the macro environment as well as market history as Hussman does. Most don't and thus underperform over any significant length of time.

Concentrated funds can cherry pick and hold more cash and I imagine their unit holders are even less likely to flee in a down market.

Investments like BRK do well when valuations get unsteady partly because of a flight to quality. I'd guess that is what's happening right now. However if its 1% of your holdings it won't make a difference to your performance, the overall market performance will decide your return.
Traderatwork - 4 years ago    Report SPAM
@Albetasunwapta " t depends on the game they are playing."???

The "game" is invest your client money and make more money for your clients. There are a lot of false prophet in this business (investment and investment advisors).

How can you spot one?

When a manager lost your money in 1, 3, 5 and 10 years period or way underperform the S&P no matter how you slice and dice it. And If a man can not walk the talk for long period of the time. You should have know he is either bluffing or he is just plain "not smart" and stubborn.

AlbertaSunwapta - 4 years ago    Report SPAM
Look at what happened to Berkowitz's fund. A mass exodus even though he was a proven quantity. Bill Miller too. Retail investors can't take the heat and get emotional at poor to negative short term performance. They chase rainbows and often sell at the worst time. So, in the end, a fund that hedges reduces volatility should be satisfactory for most investors.
Traderatwork - 4 years ago    Report SPAM
The main difference is Berkowitz make money for his clients and Hussman fund does not.

Since 2009, FAIRX is up more than 100% and if you read Berkowitz presentation on AIG (and BAC) and invest more in 2011 you make even more $$$.

The "retail investors" that believe in Hussman fund since 2000 are still under water, those invest in 2012 into Hussman fund is down more than 12% while S&P500 2012 is up 13.4%

Torben Loevendal
Torben Loevendal - 4 years ago    Report SPAM

Torben Loevendal


Most investors that comes with the claim that stock market is cheap, and should continue up, yes they come only with the claim without giving a plausible explanation why they think, the stock market will continue up. While John Hussman does not present a claim, unless he has come up with a well-documented explanation of why there is something wrong with the stock market pricing. I think it's a great well-documented piece of work he performs; you can agree or disagree with him, but to completely disregard his words, will probably not be wise at time of writing. Now we must not forget why the stock market has risen, and it is not because the economy rumble forward, it's still an economy, that ONLY is kept alive by the Fed, imagine you economy without the Fed's help, the economy would then be?

Yes it is an economy on steroids, and there is probably no one would argue that it is healthy to take steroids, there will always be some side effects, and why should it be different this time? So mockery of John Hussman and his well-meaning, comes not from here.

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