John Hussman: Stock Durations Have Become Shorter

Excerpt from the Hussman Funds' Weekly Market Comment (1/12/09):

In last week's market comment, I emphasized the shift in durations that we've observed in recent quarters, with stock durations plunging and bond durations getting much longer. The February 23, 2004 comment (Buy and Hold for the Duration?) contains an analytical discussion of duration and its importance, but the simple point here is that the longer the duration of an investment, the longer the investment horizon a passive investor requires in order to expect a reasonably predictable long-term return.

...

To give you some idea of the magnitude of the duration shifts we've observed lately, the following chart presents the duration (in years) of investments in the S&P 500 and 10-year bonds. I've placed them on separate scales since the duration of 10-year bonds is smaller, and has much less volatility than the duration of stocks.

...

Presently, the duration of stocks has fallen to about one-third of what it was in 2000. Stock durations aren't particularly low on a historical basis, but are out of the range that I've considered ridiculously dangerous since the late 1990's. In contrast, bond durations as of the end of 2008 were higher than at any time since the early 1950's, so that an investor in 10-30 year Treasury bonds is presently assured of a low yield-to-maturity if the bond is held for the long-term, while being at the mercy of market direction even to achieve that low rate of return.

Comments

[sleepless_o...:]

Very interesting analysis. An interesting graph would be the ratio of stock to bond durations.

Jan 12 11:24 AM

[Prudent Man...:]

Unfortunately, the only good investments are privately held companies that don't want the burden of public ownership.

I look to see most of the better companies with good free cash flow to go private in the coming decade of Democratic Socialism. The benefits of private ownership outweigh being public in a climate of public and private fraud, much of which has yet to be uncovered. Why get painted with that brush unless you are one of them?

Jan 12 11:24 AM

[John Lounsbury:]

We are probably going to see some more dividend reductions in 2009 and they are not likely to be offset by dividend increases. This means that, to reach the durations of the 1970's and 80's, stocks need to fall another 30%, the last supercycle lows.

John, thanks for publishing this "different look". I appreciate the references you provided and have bookmarked them.

Jan 12 02:39 PM

[Jason Rines...:]

Agree with Mr. Lounsbury. This was valuable.

Jan 12 03:45 PM