HUSSMAN ON ELEVATED MARKET RISKS
Interesting comments and chart here from this week’s Hussman commentary:
“The chart below identifies periods in recent years where we reported market conditions as being at least “overvalued” and “overbought” in these weekly commentaries. Those two conditions alone aren’t enough, by themselves, to put the market in a “hard-negative” situation, but even those two tend to be enough to invite drawdown risk. The overvalued, overbought periods are shaded in blue on the chart below. The red lines indicate the deepest drawdown experienced by the market over the following 18 months (right scale), while the blue line charts the S&P 500 (left scale). Notably, even with weakly negative conditions – overvalued and overbought – the market has typically moved lower at some point in the next 18 months, wiping out all intervening gains. That surrender of intervening gains usually begins with a very hard and unexpected initial loss that takes out the bulk of upside progress within a period of a few days or weeks. This is a general pattern that we also see throughout market history.”
The only risk in this environment is being under-invested.
This is what happens when central bankers back stop the whole bowl of marbles – psychology changes and goes to an uber-bullish extreme – everybody knows everything MUST go higher so nobody wants to sell and thus, you never get the pull-backs the perma-bears like Hussman want (of course so they can buy too, just more cheaply)…
What a misleading chart! 18 months is the key number. If you wait 18 months after you make a call to calculate the maximum draw down, then you’ll look like a genius (because the market kept going up! which makes the eventual draw down larger). And the fact that the corrections wipe out all intervening gains doesn’t really mean much. The likelihood that in any 18 month period the market will be below where it is at the start of the 18 month period seems pretty high to me. Even in 2004 and 2006 (the middle of a secular bull market), his overbought calls showed some drawdown! That just shows you how misleading this chart is.
It’d be more honest to calculate the draw down from when you INITIALLY make the overbought call. Then the draw down isn’t nearly as impressive. From a practical investing perspective, the overbought call isn’t very helpful because he’s just saying the market will go down within 18 months. But he’s giving himself a lot of leeway and doesn’t have a chart showing his predictions to be in the market. You can’t sit on the sidelines and make money. I’m not saying that the market isn’t necessarily due for a correction, but the chart is misleading as an indicator of Hussman’s predictive power for practical investing.
I have to argue with both your points:
BFerro- Are you saying Sept/Oct 2011 did not provide any “pullbacks”?
Was the 14% draw-down in August 2011 not a real enough pullback? What about the multiple 10% +/- whipsaws from Aug-Dec. ?
I’ll let Hussman take apart Mr. Chen’s statement – Per Hussman:
“Keep in mind the distinction between the drawdown and the return over a given period. The drawdown over an 18-month period is the deepest loss experienced by the market from the current point to the lowest point within that horizon, even if the deepest loss occurs fairly early in that window. In contrast, the return over a given period is measured from the starting point to the ending point. Importantly, once we observe conditions that associate with a significant risk of drawdown, we can almost always find some point later on that provides a better entry opportunity to accept market risk.”
He’s not saying don’t invest, just wait for a better entry point when the risk levels are not as elevated. I’d agree.
Certainly starting to sound like there’s nothing to fear.
Indeed – the comments posted so far provide a wonderful snapshot of current market sentiment – bearish = crazy!
To be fair I didn’t read Hussman’s piece so I didn’t see his subsequent explanation which is entirely correct that there will likely be a better entry point into the market than now. However, my main point was that this isn’t very helpful. Of course there will be a better entry point into the market in the next 18 months! Given general market volatility, I think in all of market history there are few days where this is not true! Its easy to predict something will happen over a longish time frame (in this case a rather long one in 18 months). Its an entirely different thing to make actual investment calls (when to buy and when to sell).
Ok, assume B Ferro is right – and he may well be – and we’re in another situation like late 2010 / early 2011. People are sucked in to making an investment because stocks refuse to fall. Everyone knows the market is overbought, everyone knows sentiment is stretched, everyone knows it must correct – yet still they buy.
The only people who can possibly come out of this situation with their dignity, psychology and wallet intact are
a) investors willing to buy & hold their stock positions for decades, making any downdraft like 2011′s nothing but a pimple on their long term returns
b) traders with the skill-set to get out at or near the inevitable medium-term top.
If you’d bought in January 2011 with any other objective, your money would have been at best dead for a year, assuming you’d not sold in panic in August. Why chase now when the risk/reward is so demonstrably poor?
I guess it then comes down to whether you are a trader or an investor. Traders perhaps still need to be out there taking risk despite the knowledge that a big drop could be around the corner. Alternatively, if you are looking to “put some money to work” and invest passively, it might make sense to stand aside and wait for at least a brief pullback (or DCA in)
@ Casanova
My old boss said “never let the facts get in the way of a good arguement”
The problem with your assertion is it is absolute rubbish and not backed by the facts at all. Let’s look at them.
Hussman’s flagship fund “Strategic Growth” has returned 6.24% pa since inception (24 July 2000, almost the top of the tech bull market you’ll note) and this was achieved despite his self cofessed miss of the big rise between Mar 09 and 2010. I would agree that he has been way too conservative and could have done much better but….
The SP500 stood at 1464 that day almost 12 years ago, it is 1363 today! I don’t have accumulation data to give a compounded return but since the SP500 dividend yield has been between 1 and 2% for much of those 12 years clearly the compound return is likely less than 2%pa. That doesn’t sound like “the work of a loser (as you brand Hussman) to beat the equity index by more than 4%pa for so long!!!
You would do a lot worse than take notice of his advice which is always backed by sound FACTS and well reasoned arguements.
I reckon you owe him a public apology after maligning him incorrectly, there is too much of that on this site.
Hussman has trailed the S&P in every period for the last 10+ years -
http://quote.morningstar.com/fund/f.aspx?Country=USA&ss=gf&Symbol=HSGFX
and that doesn’t even factor in taxes. Hussman’s fund has a 67% turnover which is highly tax INEFFICIENT.
inception date for his fund was in the year 2000 at the height of the last bubble. that’s the only reason this “bear” fund looks even as good as it does – you cherry pick the periods. my bet is that Hussman’s fund will continue to regress away and underperform as time goes on. and let’s not forget Hussman’s consistent bad calls since at least 1994 where if he was running the same fund with a 1994 inception his performance would be even worse than it is today. so get your facts straight.
@ Gordon
It is you who has selected the data to support your false arguement. Extend the same chart back to look at peak market to peak market as I quoted and you see a totally different picture.
You can’t use bottom of market to top as you have done. Even “Blind Freddie” can make money on that basis but how much did that same investor lose when the tech bubble burst??
Cullen why do you allow people like these to make libelous comments on your website? This is unacceptable behaviour by them and you should not condone it either
Sorry. Been in meetings much of the day.
Everyone, I understand that it can be frustrating to read analysis you vehemently disagree with, but name calling is counterproductive and gets us nowhere. Let’s try to tighten things up a bit. Thanks and have a good weekend.
Now Everyone Thinks The Market’s Going To Crash
Henry Blodget | May 30, 2010, 10:23 AM | 14,368 | 38
… Seth Klarman at Baupost Group is worried. John Hussman of the Hussman Funds says all sorts of warning lights have lit up across his screen. …
80% Chance Of A Market Crash In The Next Year
John P. Hussman, PhD | Dec. 7, 2009, 6:12 AM | 2,932 | 9
Email. Zip. 80% Chance Of A Market Crash In The Next Year. John P. Hussman, PhD | Dec. … The following is an excerpt from fund manager John Hussman’s weekly letter …
Hussman: The Market Is More Overbought Than Any Time In History
Henry Blodget | Oct. 20, 2009, 6:49 AM | 3,720 | 19
… Hussman: The Market Is More Overbought Than Any Time In History. Henry Blodget | Oct. … You have successfully emailed the post. John Hussman rains on the parade: …
Hussman On Stocks: “Abrupt Downside Risk”
Henry Blodget | May 28, 2009, 7:05 AM | 4,788 | 10
Enter you email address and zip code to set up customized email alerts. Email. Zip. Hussman On Stocks: “Abrupt Downside Risk”. Henry …
John Hussman: Volume Warns Of A Sharp Pullback
Vincent Fernando | Oct. 12, 2009, 4:23 PM | 1,889 | 9
Enter you email address and zip code to set up customized email alerts. Email. Zip. John Hussman: Volume Warns Of A Sharp Pullback. Vincent Fernando | Oct. …
A Great New Bull Market? Why?
Henry Blodget | May 14, 2009, 11:53 AM | 4,554 | 19
… In the meantime, here’s fund manager John Hussman, who comes to the same conclusion that we have: … Read John Hussman’s whole column here >. …
Enjoying The Suckers’ Rally?
Henry Blodget | Apr. 15, 2009, 1:41 PM | 13,297 | 44
… Fund manager John Hussman lays out a persuasive bear case in this week’s letter. Here’s an excerpt: … Read John Hussman’s full note here >. …
Deseret News, The (Salt Lake City, UT) – June 12, 1994
NEWSLETTER SAYS STOCKS ARE A BEAR
Hussman Econometrics (34119 W. Twelve Mile Road, Farmington Hills, Mich. 48331), which The Hulbert Financial Digest has called “the most promising newcomer among investment newsletters” after its first three-year performance doubled the market’s return, has turned bearish on stocks. “The market is beginning to display the classic traits generally associated with bull-market tops. The time to buy stocks is in the middle of a recession, not when an expansion…
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A Coupla Bears Tell Why They’re Still Growling
Pay-Per-View – Los Angeles Times – ProQuest Archiver – Mar 3, 1995
It’s not the end of civilization, Hussman says: “Stocks are just due for a natural, normal, run-of-the-mill bear market.” …
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Analyst unimpressed by Pyxis rival
Pay-Per-View – San Diego Union – Tribune – ProQuest Archiver – Jul 30, 1995
John P. Hussman of the Michigan-based newsletter Hussman Econometrics is not bullish on the stock market now,
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BusinessWeek: May 15, 1995
Adds John P. Hussman, a money manager and investment newsletter writer based in Farmington Hills, Mich.: “There’s a likelihood of slipping into a bear market at any time.”
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S&P’S 500 DIVIDEND YIELD IS 2.66%, LOWEST OF CENTURY
$2.95 – Deseret News – NewsBank – Jun 18, 1995
“The stock market has left itself no room for error,” observes Hussman Econometrics (34119 W. Twelve Mile Road, Farmington Hills, MI 48331). …
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May 5, 1996
STOCKS OFFER LOW-RISK PREMIUM, PAPER SAYS
The latest argument for higher stock prices is that Baby Boomers are saving more and investing it in stocks, notes Hussman Econometrics (34405 W. Twelve Mile Road, Farmington Hills, Mich. 48334). “In fact, there’s been no evidence of any significant increase in the U.S. savings rate. The money-flow argument ignores the fact that every buyer’s dollar that enters the market leaves it moments later with a seller. Stocks currently offer the lowest risk-premium in…
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Published on March 26, 1996, The Washington Times{PUBLICATION2}
Market’s total value points to bad times
There have been five times this century when the size of the stock market (total capitalization) relative to the size of the economy (nominal gross domestic product) exceeded 75 percent, as it does today, observes Hussman Econometrics (34119 W. Twelve Mile Road, Farmington Hills, Mich. 48331)
“Each instance coincided with a Standard & Poor’s 500 dividend yield of only 3 percent or less, as is also the case now. Each marked the peak of a major bull market
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Mr. Bear and Mr. Bull
By Mark Hulbert, 02.10.97
Forbes
The bear is John Hussman, editor of Hussman Econometrics, and adjunct professor of economics at the University of Michigan. What sets Hussman apart from the other bears isn’t his focus on the market’s fundamental extreme overvaluation. That’s something he shares with virtually every other bear. What makes Hussman’s bearishness noteworthy is his compelling explanation of the mistakes he made several years ago when he and the others turned prematurely bearish. ;
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Published on July 1, 1997, The Washington Times{PUBLICATION2}
Sky-high prices may warn of stocks’ fall
Historically, when the price-earnings ratio on the Standard & Poor’s 500 has been above 20-to-1, as it has been recently, it has always been because earnings are depressed, observes Hussman Econometrics (34405 W. Twelve Mile Road, Farmington Hills, Mich. 48334).
“This is the first time in history that we’ve seen a P/E over 20-to-1 on record earnings. The only two times the P/E exceeded even 19-to-1 on record earnings was in 1964 and 1972. In
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Published on June 3, 1997, The Washington Times{PUBLICATION2}
As dividend yields sink, how far can stocks rise?
“The extremely high returns on stocks over the past 14 years have been the result of a decline from the highest dividend yield in two generations, 6.7 percent in August 1982, to the lowest dividend yield in history, now well below 2 percent,” notes Hussman Econometrics (34405 W. Twelve Mile Road, Farmington Hills, Mich. 48334).
“It seems unlikely that the dividend yield can fall much from current levels. So it seems equally unlikely that stocks can rise
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Nov 7, 1997
Stocks have never been this highly valued when earnings were at record levels, notes Hussman Econometrics (34405 W. Twelve Mile Road, Farmington Hills, …
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Economist: U.S. might already be in recession
The San Diego Union – Tribune – San Diego, Calif.
Author: DON BAUDER
Date: Oct 30, 1998
He’s John P. Hussman of Sunrise, Fla.-based Hussman Econometric Advisors, and he says the markets are already giving off clear recessionary signals: The interest rate spread between corporate debt and Treasury debt has widened, indicating growing fear of credit risk, while the spread between long- and short-term Treasury instrument interest rates has narrowed considerably, suggesting the market expects a very sharp growth slowdown.
Combine these so-called “forward-looking” indicators with other similar ones, such as the stock market decline, the drop in consumer confidence and the National Association of Purchasing Managers Index suggesting that manufacturing is contracting, and “the signal says, `Hey, we’re expecting very slow growth, probably recession,’” Hussman says
.