Uncertainty continues for investors following a recent mixed batch of data – weaker than expected inflation, stronger than expected jobs and wages – as we enter the third week before Christmas.
And we’re ending a year that just hasn’t been great for most investors. Feels a bit of your pain, Hussman Investment Trust chairman and longtime resident John Hussman, who says investors are facing a “trapdoor” type situation with stocks right now.
The manager says he struggles to be constructive in these “overvalued markets with tattered and divergent internals” – conditions he says were seen at market highs in 2000, 2007 and 2020.
“Year-to-date market losses have retraced the frothiest segment of the recent speculative bubble, but valuations remain at levels we continue to associate with negative expectations for the S&P 500 SPX.
nominal total returns over the next 10-12 years,” Hussman wrote in a recent note to clients.
As of Nov. 30, he says the S&P 500 total return is down less than 15% from the most extreme historical levels of stock market valuations, based on a century of market cycles.
His chart below is the fund manager’s “most reliable valuation measure, based on its correlation to the actual subsequent total returns of the S&P 500 in market cycles throughout history: the market capitalization ratio US Non-Financial to Gross Value Added (MarketCap/GVA).” In short, valuations are still pretty bloody from the nose:
That’s even as they surpassed the extreme levels seen in early 2022, when interest rates were at zero, he said. The rises since then mean that speculation in search of yield has diminished, leaving the “equity market at speculative valuations, but unsupported by speculative pressures,” Hussman said.
What does all this mean?
“In our view, large market losses generally reflect risk aversion encountering a low risk premium. As a result, we continue to describe market conditions, particularly for equities, as a ‘trap door’ situation,” he writes. He is completely or almost completely covered on their three main funds.
“As always, we believe the strongest risk/return profile for equities emerges when a significant pullback in valuations is accompanied by a shift to uniformly supportive market internals. We have seen such a shift after each decline of the bear market since I introduced our key measure of internals in 1998, as well as over a century of historical data,” he said.
And of course, the ragged internals seen now mean the change isn’t here yet.
“We continue to believe that a value-driven, risk-managed and full-cycle discipline, focused on the combination of valuations and market internals, will be key to managing market volatility in the years to come” , Hussman said.
In the long term, investors will indeed be challenged, he believes.
His chart below shows their estimate of what 12-year returns might look like in a conventional passive portfolio invested 60% in the S&P 500, 30% in Treasuries and 10% in Treasuries. This red line shows the actual 12-year returns for this same portfolio composition.
Hussman holds about 10% precious metals in its strategic HSTRX total return fund.
“Historically, precious metals stocks have done much better in periods when bond yields are falling (generally below their level 6 months earlier) than when they are rising,” he said, adding that the weak dollar was also helping.
Opinion: Chances are the bear market in equities is over as investors have lost hope
ES00 Equity Futures
are down, as well as Treasury yields BX:TMUBMUSD10Y
and the DXY dollar
is a little lower. CL Crude Price
are higher after OPEC+ left production levels unchanged and a Russian price cap of $60 a barrel agreed by the EU and G-7 comes into effect.
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Hong Kong Stocks HK:HSI
climbed 4% after Beijing and more than a dozen other Chinese cities eased some testing requirements over the weekend, with Guangzhou and other industrial cities reopening. Chinese ADRS Band Also Soars – Alibaba BABA,
and Baidu BIDU
to name a few.
Faced with weaker demand, Tesla TSLA
reportedly intends to voluntarily reduce car production in Shanghai for the first time, by around 20%.
Credit Suisse CS
Shares rallied following a report that the price of the Saudi krone wants to invest in a derivative investment bank.
The Institute for Supply Management’s Service Index and Factory Orders are Monday’s highlights in a relatively data-light week.
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Farmers and scientists have developed heat-resistant wheat crops.
Iran has shut down its ‘morality police’ blamed for woman’s death that sparked months of protests
Investors looking for higher bond prices in the near term should exercise caution, according to this chart from Matt Maley, chief market strategist at Miller + Tabak., in a weekend note to clients.
He said they warned in early October that the 10-year Treasury yield BX:TMUBMUSD10Y
and the 2-year Treasury note BX:TMUBMUSD02Y
were becoming very overbought (oversold relative to price) and ripe for a big pullback, which will happen next, driving yields down significantly.
“Therefore, we think investors should be careful when looking for bonds at this time (treasuries or otherwise) in the short term. You may/should be able to get better prices later this month- here and/or early in the new year,” Maley said.
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