Guest Post by John P. Hussman
Several weeks ago, we shifted from a rather neutral near-term stock market view, to a hard-negative outlook, based on fresh deterioration in various trend-sensitive components within our broad measures of market action. From a cyclical perspective, the stock market has effectively gone nowhere since mid-2014 (with zero total return on the broad NYSE Composite since then). The past two years can be characterized less as an ongoing bull market than as the extended top-formation of the third speculative episode since 2000, the third most extreme equity market bubble in history (next to 1929 and 2000), and the most extreme point of overvaluation in history across the broad cross-section of individual stocks and asset classes.
I’ve discussed nearly every detail of our present concerns with charts, data, and analysis in dozens of recent weekly comments. The chart below is a reminder that our estimates for the prospective 10-12 year return on a conventional portfolio mix of stocks, bonds, and money market instruments have never been lower. This poor long-term outlook is also joined by immediate near-term concerns. We currently estimate flat or negative prospective return/risk profiles across virtually every major asset class, including domestic equities, international equities (which despite better relative valuations, still tend to have a beta of roughly 1.0 when U.S. markets decline), Treasury bonds, corporate bonds, junk bonds, utilities, and even precious metals shares (which despite reasonable long-term valuations are facing sufficient near-term headwinds to keep us roughly neutral).
We don’t expect the current situation to end well for investors who insist on taking larger investment exposures than they’re actually willing to hold, with discipline, through a period of severe market losses. From present valuation extremes, a 40-55% market loss would represent a fairly run-of-the-mill resolution to the current market cycle; a decline that would take valuations only to the high-end of the range they’ve visited or breached over the completion of every market cycle in history. By the completion of the current cycle, I expect over $10 trillion of what investors count as paper “wealth” in U.S. equities to disappear without a trace.
What a great piece. We hear this from any # of people,
yet many of us freeze and deny. We get a house call if
we attempt to take a coupla K cash out of the bank. We
already exist under capitol control. What is a poor girl
to do?