Monday, May 5, 2014

Hussman Weekly Market Comment: Cahm Viss Me Eef You Vahn to Live

Link to: Cahm Viss Me Eef You Vahn to Live
“Observation over many years has taught us that the chief losses to investors come from the purchase of low-quality securities at times of good business conditions. The purchasers view the good current earnings as equivalent to ‘earning power’ and assume that prosperity is equivalent to safety.”

Benjamin Graham

“I got wiped out personally in 1968, which was the last really crazy, silly stock market before the Internet era… I became a great reader of history books. I was shocked and horrified to discover that I had just learned a lesson that was freely available all the way back to the South Sea Bubble.”

Jeremy Grantham

“Cahm viss me eef you vahn to live.”

Arnold Schwarzenegger, Terminator 2: Judgment Day

We’ve recently emphasized that our estimates for probable S&P 500 nominal total returns have now declined below zero on every horizon of 7 years and shorter. At longer horizons, the 6.3% growth rate that we’ve assumed for nominal GDP over the coming years will begin to bail investors out given enough time, and as a result, our projection for 10-year S&P 500 nominal total returns peeks its head up above zero, at about 2.4% annually from current levels. Looking out 15 years, the expected 15-year total return approaches 4.4% annually, and at that horizon, investors are unlikely to lose money even if actual returns are a standard deviation below our expectations. To the extent that 6.3% growth in nominal GDP seems too high (and there are certainly reasons to think so), just reduce those annual return projections accordingly.

The key point is this – everything that investors can expect to obtain from selling stocks 7 years from now is already on the table today. Valuations might move higher over the very short run, but at present valuations, investors would require a positive surprise more than one standard deviation above expectations just to pull the likely 2-year return out of negative territory.