John Hussman of the Hussman Funds keeps banging away on the impending-market-crash drum, this time in a long interview with Kathryn Welling of welling@weeden. Hussman's points won't come as any surprise to Investment Intelligencer readers, but they are so rare in the larger world of market commentary today that I'll keep repeating them. (And when the market doubles from here and stays there for a generation, you can throw both of us to the dogs):
- The market is trading at 19-times "peak earnings" (Hussman's equivalent of the cyclically adjusted P/E). The common bullish arguments that the market's P/E is 15-times (or less) have no basis in theory or historical fact. Today's valuation is similar to that of many historical peaks, such as 1929.
- Profit margins have always been mean-reverting, and none of the theories floated to suggest that they will forever remain at today's nosebleed level (50% above their historical average) make sense. These theories, moreover, are only floated by a handful of thoughtful bulls--the rest don't even bother to try to account for today's high profit margins.
- The long-term profit growth trend line in the U.S. is 6% a year. The reason everyone thinks (and says) profits will grow at least 10% a year forever is because profits have grown that fast for five years (a.k.a., eternity).
- "Fair value" on the S&P is at least 40% below current levels, even if one makes allowances for the (unlikely) possibility that cheap labor in China and India have permanently improved the profitability of U.S. corporations.
- The market might go up another 10% before it has a typical 10% correction. From now until after this 10% correction, however, the market will have been outperformed by T-bills.
Hussman does not go so far as to make a forecast, but, for him, he comes awfully close. And given these data points, who can blame him? He also notes that rising interest rates usually suggest that mean-reversion will come sooner rather than later (which it certainly did in 2000).
After having lived through the 1990s, and been on the opposite side of this argument, I can confirm that long-term valuation metrics are worthless at predicting near-term market movements: In the late 1990s, bears like Hussman were not "cautious," they were "wrong," and year-after-year they were carried out on stretchers. This said, after the market finally collapsed, they looked pretty good.
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