From theburningplatform.com:
The facts speak for themselves. Your choice is to believe in the almighty ability of academic bankers to keep their confidence game going, or exit now before the apocalypse hits. I got no dog in this hunt. I ain’t selling newsletters, gold, or investment ideas. I strictly look at the facts. And they tell me to stay as far away from the financial markets as humanly possible. It isn’t a matter of if, only a matter of when. Here are the pertinent snippets from Hussman’s Weekly Letter:
Unless we observe a rather swift improvement in market internals and a further, material easing in credit spreads – neither which would relieve the present overvaluation of the market, but both which would defer our immediate concerns about downside risk – the present moment likely represents the best opportunity to reduce exposure to stock market risk that investors are likely to encounter in the coming 8 years.
Last week, the cyclically-adjusted P/E of the S&P 500 Index surpassed 27, versus a historical norm of just 15 prior to the late-1990’s market bubble. The S&P 500 price/revenue ratio surpassed 1.8, versus a pre-bubble norm of just 0.8. On a wide range of historically reliable measures (having a nearly 90% correlation with actual subsequent S&P 500 total returns), we estimate current valuations to be fully 118% above levels associated with historically normal subsequent returns in stocks. Advisory bullishness (Investors Intelligence) shot to 59.5%, compared with only 14.1% bears – one of the most lopsided sentiment extremes on record. The S&P 500 registered a record high after an advancing half-cycle since 2009 that is historically long-in-the-tooth and already exceeds the valuation peaks set at every cyclical extreme in history but 2000 on the S&P 500 (across all stocks, current median price/earnings, price/revenue and enterprise value/EBITDA multiples already exceed the 2000 extreme). Equally important, our measures of market internals and credit spreads, despite moderate improvement in recent weeks, continue to suggest a shift toward risk-aversion among investors. An environment of compressed risk premiums coupled with increasing risk-aversion is without question the most hostile set of features one can identify in the historical record.
Short term interest rates remain near zero, 10-year bond yields have declined below 2%, and our estimate of 10-year S&P 500 total returns has declined to just 1.4% (see Ockham’s Razor and the Market Cycle for the arithmetic behind these historically-reliable estimates). Recent weeks mark the first time in history that our estimates of prospective 10-year returns on all conventional asset classes have simultaneously declined below 2% annually. We don’t expect a portfolio mix of stocks, bonds and cash to achieve any meaningful return over the coming 8-year period. The fact that the financial markets feel wonderful right now is precisely because yield-seeking speculation and monetary distortions have raised security prices today to levels where they are likely to stand years from today – with steep roller-coaster rides in the interim.
Even so, historical considerations that have been effective in market cycles across history (and that also would have captured the majority of the market advance since 2009) presently suggest considerable risk of what we’ve often called an “air pocket” – similar to what we observed last October – over the coming 10-12 weeks, with much more severe downside risk possible over the course of the next 18-24 months.
To continue reading: Exit Now
