Hussman Market Comment

Except for the 2000-2002 bear market, which ended at valuations that were still about 25% above historical norms, every other bear market decline in history, including the 2007-2009 decline, has taken reliable valuation measures to historical norms that presently stand between -60% and -65% below present market levels. The primary importance of internals here is to discourage fighting the market with a hard-negative near-term outlook until speculative psychology again shifts toward risk-aversion.

Probably the most useful exercise we can do at present is to examine where the markets and the U.S. economy are in their respective cycles - with 19 charts and detailed analysis. There’s little question that the market is long into what Rhea described as the final phase of a bull market; “the period when speculation is rampant – a period when stocks are advanced on hopes and expectations.”

I understand why many investors want reassurance that a 60% market loss is impossible. It is better for investors to be prepared, so they don't discover later that a run-of-the-mill completion of this speculative market cycle has somehow violated the ground rules of their existence.

Investors should not imagine that a shift to outright easing by the Fed would necessarily be favorable for stocks. A look at valuations, market internals, and monetary policy, with notes on Modern Monetary Theory.

Bull market or bear market? Bargain or bubble? Late-cycle or new economy? Recession or continued expansion? More rate hikes or a new round of QE? Buy stocks or buy bonds? Keep reading.

Quantitative easing wasn’t about creating more “liquidity,” or encouraging more bank loans, or any of the other excuses tossed around for it. What quantitative easing really did was to replace interest-bearing Treasury bonds held by the public with a mountain of zero-interest money that was so uncomfortable to hold that it drove investors absolutely crazy.

Valuations are informative about long-term returns and full-cycle risks. Market internals are informative about investor psychology over shorter segments of the cycle. Presently, neither valuations nor internals are favorable, and that is what opens up a trap door under the market.

The music is fading out, and a trap-door has opened up in the floor, but they're still dancing.

Current stock market capitalization is largely an artifact of speculative psychology, not reasonably discounted cash flows. Unless investors rely on eternal sunshine of the spotless mind – the assumption that current levels of extreme cyclical optimism will be permanent – they should not expect the associated valuation extremes to be permanent either.