Excerpt from the Hussman Funds' Weekly Market Comment (2/10/14):
On the basis of a broad range of valuation measures that are tightly (nearly 90%) correlated with actual subsequent S&P 500 total returns over the following decade, we estimate that stock prices are about double the level that would generate historically adequate long-term returns. The chart below presents estimated versus actual 10-year S&P 500 total returns using a variety of methods that I’ve detailed in prior weekly comments, and including a few additional ones for good measure. We presently estimate 10-year S&P 500 nominal total returns of only about 2.7% annually over the coming decade, with negative returns on all horizons shorter than about 7 years.
These are, of course, the same methods that allowed us – in real time – to project negative 10-year total returns for the S&P 500 in 2000 even under optimistic assumptions, to identify severe overvaluation in 2007, and to quantify the shift to reasonable valuations in late-2008 and 2009 (our stress-testing response to the credit crisis was emphatically not based on valuation). Note also that valuations are not the sole driver of our investment stance, as should be clear from our shift to a favorable market outlook in early 2003, following the 50% market plunge in 2000-2002.
Fortunately, the prospect of awful market returns and steep downside risk from present market levels certainly does not imply a lack of opportunities over time. Valuations adjust, and market conditions change. I fully expect to observe outstanding investment opportunities over the completion of the present market cycle and the next, even if a moderate retreat in valuations leaves them well above historical norms (as we saw in 2003). Now is not the moment to feel rushed to commit capital to a Fed-induced speculative carnival.
One of the seemingly confusing aspects of Friday’s employment report was the increase of 638,000 jobs in the household survey, which contrasted with the rather disappointing 113,000 jobs in the more widely followed payroll survey. What many of the talking heads called a troubling difference can be explained by a footnote in the report from the Bureau of Labor Statistics: “household survey data for January 2014 reflect updated population estimates.” The civilian labor force itself was revised higher by 523,000 individuals.
Here’s how these revisions work (from Business Statistics of the United States, Strawser, 2012): “Official [current population survey] data are characterized by periodic discontinuities, which occur when benchmarks for Census measures of the total population are introduced. These updates take place in a single month – usually January – and the official data for previous months are typically not modified to provide a smooth transition… Such discontinuities occur throughout the history of the series.”
One of the more notable examples of this is was in January 2000, when the household employment figure jumped by 2,036,000 jobs, while the civilian labor force jumped by 2,090,000. By comparison, the total non-farm payroll figure (establishment survey) increased only by 233,000. The nearly nine-fold difference between the household and establishment figures wasn’t some gross aberration or cause for alarm in the field of economic analysis. It simply reflected standard practice in adjusting the household data for changes in estimated population.