As markets hit multi-year highs (in part due to positive action from the Fed and the ECB), fund manager John Hussman says something dramatic:
As
of Friday, our estimates of prospective return/risk for the S&P 500
have dropped to the single lowest point we’ve observed in a century of
data. There is no way to view this as something other
than a warning, but it’s also a warning that I don’t want to overstate.
This is an extreme data point,
but there has been no abrupt change; no sudden event; no major
catalyst. We are no more defensive today than we were a week ago,
because conditions have been in the most negative 0.5% of the data for
months. This is just the most negative return/risk estimate we've seen.
It is what it is.
Hussman's general approach is to look at an
"ensemble" of datapoints, and then compare them to previous market
periods to see how stocks generally performed after this signals emerged.
He notes that "single lowest point" does not
necessarily mean most overvalued (which was in 2000), but merely that
the complete ensemble gave the most negative reading.
So what makes this moment so fraught with risk?
Hussman gives a taste of his secret recipe for measuring the market:
Despite the uniformity
of negative signals we presently observe, I can’t say with certainty
that this particular instance will produce negative market outcomes, or
that we won’t find ourselves at odds with a speculative, richly valued,
overbought, overbullish but still-advancing market. But even setting
aside our particular methods, we have a very mature market advance, at a
high Shiller P/E, atop nearly every upper Bollinger band (two standard
deviations above the 20-period average at daily, weekly, and monthly
resolutions), in an environment of lopsided bullishness. All of this
should make bells go off for anyone familiar with market history. Of all
the investment adages that are being embraced as reasons to accept
market risk, somehow the phrase “buy low, sell high” is conspicuously
absent. I expect that this will prove to be a crucial error for
investors. In all of the present ebullience about quantitative easing
with no ex-ante amount (which I’ll again point out is far different than
“unlimited” QE), the market conditions we observe at present have been
consistently associated with negative outcomes throughout history.
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