Monday, February 3, 2014

Hussman Weekly Market Comment: Pushing Luck

Link to: Pushing Luck
The latest data from the NYSE shows equity margin debt at a new all-time high. Relative to GDP, the current 2.6% level was eclipsed only once – at the March 2000 market peak. In the context of the most extreme bullish sentiment in decades, and reliable valuation metrics about double their historical norms prior to the late-1990’s bubble (price/revenue, market cap/GDP, Tobin’s Q, properly normalized price/forward operating earnings, price to cyclically-adjusted earnings), we view present market conditions as dangerously speculative. 
Before it’s too late, I should note – as I also did at the 2007 market peak just before the market collapsed – that unadjusted forward operating P/E ratios and the Fed Model are both quite unreliable indications of value or prospective returns (see Long-Term Evidence on the Fed Model and Forward Operating P/E Ratios). 
Even the shallow 3% retreat from the market’s all-time highs may be enough to prompt a reflexive “buy-the-dip” response in the context of extreme bullish sentiment here, as the S&P 500 bounced off of a widely monitored and steeply ascending trendline last week that connects several short-term market lows over the past year. Regardless, the potential for short-term gains is overwhelmed by the risk of deep cyclical and secular losses. We presently estimate prospective 10-year S&P 500 nominal total returns averaging just 2.7% annually, with negative expected total returns on every horizon shorter than 7 years. 
Could the stock market’s valuation really be double its historical norm? Yes, this is presently the case for numerous historically reliable measures, including price/revenue, market cap/GDP, Tobin’s Q, and a variety of properly normalized earnings-based measures.