This Time Is Different, But Not How Investors Imagine It Is Different

Note: We hope you like the new look of the Hussman Funds website. We’ve never been much for a corporate look, preferring a feel that’s both friendly and informative. After 25 years of using HTML, learning a new content-management system was like a massive game of “Where’s Waldo?” We’ve added a few new features, including a mailing list (100% spam-free) to notify readers of new content. Given the ability to notify readers in the event of new content and special updates, I’ve decided, after more than 30 years of weekly writing, to move my analysis and commentary to a monthly schedule. On a weekly schedule, very extensive research and discussion is too often immediately obscured by new content, while periods of unchanged market conditions can result in more repetition than may be useful. Since I regularly try to address themes and topics that are widely discussed in the financial markets, a monthly schedule will help to give those discussions greater exposure. There are also a couple of book projects that have been calling my name for well over a decade, so my hope is that the writing I don’t publish weekly will be the basis for more durable publications. In the event of significant market events, I expect to issue interim reports even mid-week if there’s something important to share. Thanks – JPH

Over time, price/revenue ratios come back in line. Currently, that would require an 83% plunge in tech stocks (recall the 1969-70 tech massacre). If you understand values and market history, you know we’re not joking.
– John P. Hussman, Ph.D., March 7, 2000

Based on the valuation measures we’ve found to be most reliably correlated with actual subsequent market returns in market cycles across history, including those of recent decades, we presently expect the average annual total return of the S&P 500 over the coming 10-12 year horizon to be negative. Market valuations, on these measures, presently approach or exceed the 1929 and 2000 extremes, placing U.S. equity market valuations at the most offensive levels in history. Indeed, with median valuations on these measures now more than 2.7 times their historical norms, there is strong reason to expect a market loss on the order of -63% over the completion of the current market cycle; a decline that would not even bring valuations below their historical norms (which we’ve typically seen by the completion of nearly every market cycle outside of the 2002 low).

Let’s begin with our preferred valuation measure; the ratio of nonfinancial market capitalization to corporate gross value-added, which I introduced in 2015. The chart below shows MarketCap/GVA on an inverted log scale (blue line, left scale), along with the actual subsequent S&P 500 nominal average annual total return over the following 12-year period (red line, right scale). Note that the current level of valuations is now associated with an expected loss in the S&P 500 over this horizon, even including dividend income.

There are numerous alternative metrics peddled by Wall Street’s buy-side designed to assure investors that valuations are just fine. These need not cause confusion, provided that investors insist on asking two basic questions:

1) how closely are those alternative measures correlated with actual subsequent market returns in market cycles across history? In particular, examine the 10-12 year horizon (which is the point where the “autocorrelation profile” of valuations reaches zero, meaning that large deviations from normal valuations are typically resolved within that time frame);

2) is the fundamental being used a plausible “sufficient statistic” for the very, very long-term cash flows that stocks will deliver to investors over time? Analysts often use sketchy denominators like M2, marketable debt, or other figures that had a reasonably proportional relationship to GDP across most of history, but have exploded higher in recent years. Using these exploding denominators makes it appear that stocks are still “cheap” relative to those benchmarks, even if they have nothing to do with corporate cash flows.