Hussman Market Comment

I may as well just say it. Based on the present combination of extreme valuations, unfavorable and deteriorating market internals, and a rare preponderance of warning syndromes in weekly and now daily data, my impression is that the speculative market advance since 2009 ended last week. Barring a wholesale shift in the quality of market internals, which are quickly going the wrong way, any further highs from these levels are likely to be minimal. In contrast, current valuation extremes imply potential downside risk for the S&P 500 on the order of 50-70% over the completion of this cycle.

Statistically, the current set of market conditions looks more “like” a major bull market peak than any point in the past 75 years, and I suspect, any point other than the 1929 peak. As Jeremy Grantham recently observed, "This is where you start bear markets from."

The stock market presently stands at valuation extremes matched only twice in U.S. financial history: the week ended December 31, 2021, and the week ended August 26, 1929. Meanwhile, despite all the bluster about technological improvements driving durable increases in corporate profitability over time, the fact is that corporate profit margins before interest and taxes have hovered around the same level for 75 years.

We estimate that current market conditions now “cluster” among the worst 0.1% instances in history – more similar to major market peaks and dissimilar to major market lows than 99.9% of all post-war periods.

The S&P 500 is two years into what we expect to be a very long, interesting trip to nowhere. The strongest stock market returns in the coming decade, perhaps longer, are likely to emerge during advances in the S&P 500 that attempt to catch up with the cumulative return of risk-free Treasury bills. Recall that investors experienced the same outcome between 1929-1947, 1968-1985, and 2000-2013.

The yearning affection that investors hold for Fed pivots is quietly driven by the fact that nearly all the pivots occurred when the S&P 500 already stood at historically normal or depressed levels of valuation. The associated market returns were typically a function of two factors: favorable valuations, coupled with an improvement in market internals. It’s those factors – the central elements of our investment discipline – that actually correlate with favorable market outcomes.

In every noise-reduction problem, uniformity matters. There is vastly more information in the common signal drawn from multiple sensors than there is in any single measure by itself. While we still don’t have enough data to anticipate a recession with high confidence, my view is that the sudden enthusiasm about a 'soft landing' runs exactly opposite to the trend of the data.

The recent 'everything bubble' has taken its dear sweet time to collapse. Even though the S&P 500 remains down from its early 2022 peak, and 30-year Treasury bonds have lost over half their value since early 2020, the market has maintained the appearance of 'resilience.' Yet there need not be a proportional relationship between the size of the last grain of sand, the length of the last straw, or the weight of the landing butterfly, and the extent of the catastrophe they provoke.