I’m of many minds about the market, depending on how I feel in a given moment, so I try to avoid prognosticating… but if you want to force yourself to think about risk, as we all should do at least some of the time, one of the best go-tos is John Hussman, who has a horrible long-term investing record in the mutual funds he manages (partly because he acknowledges his past errors in underestimating investor psychology and the power of momentum and ‘market internals’, to paraphrase), but does a great job of explaining how expensive the market is. Here’s a little excerpt from his latest update…
A remarkable feature of extended bull markets is that investors come to believe – even in the face of extreme valuations – that the world has changed in ways that make steep market losses and extended periods of poor returns impossible. Among all the bubbles in history, including the 1929 bubble, the late-1960’s Go-Go bubble, the early 1970’s Nifty-Fifty mania, the late-1990’s tech bubble, and the 2007 mortgage bubble that preceded the global financial crisis, none has so thoroughly nurtured the illusion that extended losses are impossible than the bubble we find ourselves in today.
“… Valuations have reached record extremes while our measures of “uniformity” across market internals have shown increasing deterioration and dispersion, reflecting increasing selectivity and emerging risk-aversion. In recent weeks, this dispersion has widened further. This is serious. Among additional features of market action to monitor, keep an eye on credit spreads and low-grade bond yields, as well as any tendency for the number of individual stocks setting 52-week lows to expand – though I suspect those may coincide with stock market weakness rather than preceding it….
“When extreme stock market valuations are the starting point, one often finds that bonds or even Treasury bills have outperformed stocks even a decade or two later. As I’ve often noted, the total return of the S&P 500 lagged even Treasury bills from 1929-1947, 1966-1985, and 2000-2013. That’s just what overvalued markets do.
And then the kick-in-the-pants quote, at least for me:
“It may be the greatest collective error in the history of investing to pay extreme multiples for extreme earnings that reflect extreme profit margins and extreme government subsidies, while imagining that those multiples also deserve a ‘premium’ for depressed interest rates that reflect depressed structural economic growth….