Hussman Weekly Market Comment: Release the Kraken
Over
the past 13 years, and including the recent market advance, the S&P 500 has
underperformed even the minuscule return on risk-free Treasury bills, while
experiencing two market plunges in excess of 50%. I am concerned that we are
about to continue this journey. At present, we estimate that the S&P 500
will likely underperform Treasury bills (essentially achieving zero total returns)
over the coming 5 year period, with a probable intervening loss in the range of
30-40% peak-to-trough.
Of course, rich valuations
can persist for some time - predictably resulting in poor long-term returns,
but often doing little to prevent short-run speculation and temporary gains.
The issue is then to identify the point at which overvalued conditions are
joined by sufficiently overextended conditions, and a sufficient loss of
speculative drivers, to make rich valuations "bite" even in the
shorter-term. This is where additional criteria come in, such as overbought
technical conditions and extreme optimism in the form of low bearish sentiment,
depressed mutual fund cash levels, and heavy insider selling. Presently, it
doesn't help that T-bill yields and long-term bond yields remain higher than 6
months ago, and we have signs of oncoming recession. This is particularly
evidenced by collapsing economic measures in Europe, softening economic
performance in developing economies including China and India, and jointly weak year-over-year growth in
key U.S. economic measures such as real personal income, real personal
consumption, real final sales, and reliable leading indicators from the OECD
and ECRI, as well as our own measures.