John Hussman: Long-Horizon Risk Aversion Creates Headwinds

Excerpt from the Hussman Funds' Weekly Market Comment (6/22/09):

No question about it, the stock market has enjoyed a nice rebound from deeply oversold conditions, amounting to a recovery of just under 1/3 of losses that the market suffered from its 2007 peak. This has been accompanied, until recent weeks, by an easing in risk aversion from what, in hindsight, could be called “fear lows” (though not necessarily the “revulsion lows”) of this downturn.

...

More sophisticated measures of risk aversion lead to similar conclusions here. Specifically, the problems aren't over and investors seem to know it. Investors appear to be quite concerned that the fiscal wasteland we've entered into to address the situation poses a host of long-term problems. The somewhat knee-jerk rebound since March has been driven by short covering, “green shoots” optimism, and a misplaced belief that stocks are cheap just because they've declined from untenable overvaluations. That dynamic has largely played out, and now requires real, tangible economic improvements to justify further strength.

On that front, Bill Hester reports that his tally of economic surprises, relative to consensus expectations, has begun to fall short in recent weeks. The latest chart is presented below. For further details, see Bill's April article A Stock Market Rebound Closely Linked With Economic Data Surprises. As the Wall Street Journal's Mark Gongloff observes, "a more-significant rally from here will depend, in no small part, on economic data surprising again, and the bar has gotten higher."

That's not to say that we can't observe a fresh wave of positive economic surprises, or that we can rule out further upside. But we should approach the market here with the knowledge that the headwinds, both in terms of economic prospects, and in terms of longer-term investor risk aversion, remain very strong.

Comments

[morph366:]

The long term headwinds will also help to reinforce the greater marginal propensity to save. The consumer subliminally knows that there are more austere times ahead.
Other than inflation contributing to continued asset price appreciation (which would not translate into real gains) those who are looking forward to a new bull market in equities need to identify what replaces consumerism -the 70% driver of GDP - which existed during the "boom" years.

Jun 23 12:20 PM

[Sovestor:]

The bar has gotten higher...that's likely correct. However, we think investors' biggest problems nowadays are to make sure investors are NOT to be bullied and lied by investment managers. Investors now need to focus on their return OF investment not just return ON investment (just like PIMCO's Bill Gross said in his recent post).
Hence, we think investors will be better served reading this:
www.sovestor.com/conte...

Jun 23 12:36 PM

[CautiousInv...:]

I think we have identified the risks to this recovery but I believe we continually underestimate their respective effects, giving rise to surprises to the downside. I will mention two.

Retrenchment in consumer spending, along with the prospect for structural unemployment, will be a brake on our economy and all of those that export to our shores to satisfy the insatiable spending appetites of our domestic consumers. Historically, we have been the engine of global growth and no one country or region is poised or prepared to take our place.

We are attempting to offset this contraction in consumer spending with massive fiscal stimulus leading to unprecedented deficits and borrowing. CBO estimates show that the public held $5.8 trillion of UD debt at the end of 2008 and under their assumptions and forecasts this will increase to $17.2 trillion by the end of 2014………over $11 trillion of borrowing in a world (1) experiencing slower economic growth and trade (2) whose banks are deeply troubled and whose actual health is poorly understood, if at all, and (3) in which many ($trillions) claims will be made upon scarce resources to finance nation state and global agency stimulus programs.

Jun 23 03:33 PM

[untrusting ...:]

What is the point of even investing at all if we talk about is Return OF investment. That is no investment at all ... just loss control. And that is precisely the point of considering investing in US equites at this point, the risk of loss simply outweights the potential for gain. Thus why be a buyer of stock at these levels?


On Jun 23 12:36 PM Sovestor wrote:

> The bar has gotten higher...that's likely correct. However, we think
> investors' biggest problems nowadays are to make sure investors are
> NOT to be bullied and lied by investment managers. Investors now
> need to focus on their return OF investment not just return ON investment
> (just like PIMCO's Bill Gross said in his recent post).
> Hence, we think investors will be better served reading this:
> www.sovestor.com/conte...

Jun 23 05:09 PM

[basehitz:]

Q end window dressing is almost over. Notice the recent wave of upgrades? Not to imply that the WS frat boys are self-serving of course. I will be keeping a very close eye on early July with a new earnings/warning season upon, and no immediate motivation to paint the tape.

We have never been this far in debt. Never!
I'd encourage all to read the entire article, but for now, at least scroll down to see the chart, 3rd from the bottom entitled "US Total Debt to GDP".
seekingalpha.com/artic...

Be careful.

Jun 24 09:15 AM

[untrusting ...:]

Well, one has to wonder how the buyer's/longs are feeling now after the first week in July? Not looking to good at this point is it? US markets are off 5+% over the last 3 weeks, futures are pointing down for Monday yet again, oil now down from $73 to about $65 in the last week, etc, etc. It is looking more and more like the next downleg is underway now. Also looks more and more like Goldman, JPM, etc. have stopped intervening/supporting the market as there seems to have been much less support spikes over the last 3 weeks. To those who were cautious, you may well be rewarded with much cheaper buying opportunities over the next few months. Time will tell, but maybe the "hare will beat the rabbit" yet again.


On Jun 23 05:09 PM untrusting investor wrote:

> What is the point of even investing at all if we talk about is Return
> OF investment. That is no investment at all ... just loss control.
> And that is precisely the point of considering investing in US equites
> at this point, the risk of loss simply outweights the potential for
> gain. Thus why be a buyer of stock at these levels?

Jul 05 11:47 PM