Hussman: Who’s Who of Awful Times to Invest

Last year John Hussman posted an article describing the March period as “an awful time to invest”.  He described some unusual confluence of events that tended to be followed by market declines.  The S&P 500 subsequently declined by over 10%.   Well, according to Hussman the current environment is very close to repeating that unusual environment (via Hussman Funds):

Last week, the S&P 500 came within 1% of reprising a syndrome that we’ve characterized as a Who’s Who of Awful Times to Invest, featuring a Shiller P/E over 18 (S&P 500 divided by the 10-year average of inflation-adjusted earnings), the S&P 500 more than 50% above its 4-year low and 8% above its 52-week smoothing, investment advisory bulls (Investors Intelligence) over 47% with bears below 27%, and Treasury bond yields higher than 6 months earlier. This combination is one of numerous and nearly equivalent ways of defining an “overvalued, overbought, overbullish, rising-yields” syndrome. While there are certainly numerous conditions that are informative about stock market returns, and capture a much broader set of negative market outcomes, I don’t know of any other syndrome of market conditions – however defined – that has been so consistently hostile for stocks over the past century.

The historical instances corresponding to the above conditions represent a chronicle of overextended bull market rallies, where investors would typically have been quite incorrect to declare victory at halftime:

December 1972 – January 1973 (followed by a 48% collapse over the next 21 months)

August – September 1987 (followed by a 34% plunge over the following 3 months)

July 1998 (followed abruptly by an 18% loss over the following 3 months, and at the beginning of a nearly 14-year period where the S&P 500, including dividends, has underperformed Treasury bills, with the S&P 500 nearly 30% lower four years later)

July 1999 (followed by a 12% market loss over the next 3 months, and a series of whipsaw recoveries and losses, with the S&P 500 over 40% lower three years later)

January 2000 (followed by a spike 10% loss over the next 6 weeks, a series of whipsaw recoveries and losses, and finally a bear market that took the S&P 500 over 45% below its Jan 2000 level by late 2002)

March 2000 (followed by a spike loss of 12% over 3 weeks, and a 49% loss into 2002)

July 2007 (followed by a 57% market plunge over the following 21 months)

January 2010 (followed by a 7% “air pocket” loss over the next 4 weeks, with a recovery into April and then a renewed decline, leaving the S&P 500 about 11% lower by July)

April 2010 (followed by a 17% market loss over the following 3 months)

December 2010 (near the start of QE2, and followed by a 10% further advance in the S&P 500 into May 2011, when an additional syndrome emerged that was also observed last week – see Extreme Conditions and Typical Outcomes –  whereupon an 18% market plunge wiped out the entire gain, and then some).

March 2012 (followed by a further advance of about 3% over the following 3 weeks, and then a quick if unmemorable market decline of nearly 10%).


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  1. I have been a daily reader of pragcap for three years and i find it to be the most informative site out there of its kind. Unfortunately, I have been lead to read many of these hussman articles over that time and this one is, as usual, infected with data mining and completely antiproductive

  2. I always like to point out Hussman’s performance. Especially since our host slams fund managers for not adding any value.

  3. I fear there is too much toying with degrees of freedom which may result in less predictive power in the future (the dreaded and real “out of sample”). There is a germ of truth, namely, overvalued + overbought markets is a recipe for disaster.


  4. Four of those examples all took place in the lead up to the peak of the “tech bubble” and all of the following major declines are the 2002 bottom. I think the implication that a huge downdraft is coming seems to ignore that we’ve already have one where those previous examples were leading up to one.

    That’s not to say this might not be a good short-term indicator since the average intra-year decline on the S&P 500 is something like 14%.

  5. What does Bernanke have that Hussman doesn’t have? An $85B per month
    heroin drip. What could possibly go wrong?

  6. Hussman has been writing scare pieces since the mid 90’s…many of is pieces are just dusted off and updated. He will be right occasionally, but you can’t trade off of him as you’ll go broke before he is right.

  7. Apparently Tom DeMark got a “13” countdown Sell indicator on the S&P the other day (although he was also calling for one last bump higher). And it looks like buyer exhaustion (to my non-expert eye) since Jan 3rd.

  8. Yeah, he likes to throw the quote in to show how he “called” the market correctly back in 2007 but fails to mention that his fund lost 33% since that time. Glad we bailed a couple of years ago.

  9. Yes – well done Chad – you get it!

    Dr Hussman isn’t running an investment newsletter service where he tries to come up with trading ideas each week. Anyone who tries to trade off his commentary is a complete amateur who has absolutely no appreciation for what he’s about.

    For those of us who have been around for a while, you would have heard at least a few times a very important saying which goes along the lines of “…the most important factor when reading research is knowing the author’s time horizon…”.

    I hope anyone who chooses to comment on Hussma can recite what his objective and time horizon is (he talks about it all the time)…

  10. Hussman is a great economist but a lousy investment manager. He has been predicting doom and gloom for as long as I can remember. Since the bottom in March 2009 he has underperformed the S&P 500 by 15,000 basis points (+136% vs -13.49% total return). And as his missive shows, there have been many times in this current bull market where he has cautioned investors that it was an awful time to invest. He will eventually be right claim he told us so. But i’m not sure investors in his fund are happy they have missed this bull market.

  11. When you come across an indicator such as..

    “a Shiller P/E over 18 (S&P 500 divided by the 10-year average of inflation-adjusted earnings), the S&P 500 more than 50% above its 4-year low and 8% above its 52-week smoothing, investment advisory bulls over 47% with bears below 27%, Treasury bond yields higher than 6 months earlier”

    You know the author has a predetermined outlook, regardless of changing variables, and will find whatever they can find to defend it.

  12. I seriously can’t believe you guys… “…for as long as I can remember…” Since 2009??? Really???

    You people have no appreciation for research and understanding. Always just flipping coins and following yesterday’s “hot” hedge fund guy who got lucky. Struggling to make a consistent profit, but always keen to criticise and pretend that the only reason why you don’t run a billion$ hedge fund is because you don’t want to…

  13. Ok, lets talk about time horizons. I know he talks about peak to peak returns and trough to trough returns. I’d rather talk about 3 year, 5 year, 7 year, and 10 year returns. Lets look at those (total returns as of 12/31/12 — dividends included)

    3 year: -14.39% vs +36.27% s&p 500
    5 year: -18.55% vs +8.59% s&p 500
    7 year: -12.19% vs +32.63% s&p 500
    10 year: +18.16% vs +98.48% s&p 500

    I’d go farther back but his fund began in 2002.

    So I do have an appreciation for research and understanding. But I have an even bigger appreciation for results. And the results I pointed above speak for themselves.

  14. Fair enough…. I respect your answer. But what you’re saying is that you have a totally different investment objective and time horizon to Hussman.

    I’m an investment pro so I perhaps see things from a different perspective. You need to realise that when you’re making investment decisions for large investment funds (“fund of funds”-style) total return is not necessarily the most important thing – a lot of Hussman’s investors will be very pleased with the results he has delivered them – the return he has earned them on their say $100M investment with him sits very well among their $3Bill portfolio…