John Hussman: The Journeys Of Sisyphus

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 |  Includes: DIA, IWM, QQQ, SPY
by: John Hussman

Excerpt from the Hussman Funds' Weekly Market Comment (5/19/14):

After little more than a year of legitimate revaluation of equities following the 2007-2009 credit crisis, and more than three years of what will likely turn out to be wholly impermanent – if dazzling – Fed-induced speculation, investors have again pushed the stone to the top of the mountain. Despite the devastating losses of half the market’s value in 2000-2002 and 2007-2009, investors experience no fear – no suffering as a result of present market extremes. There is no suffering because at every step, as Camus might have observed, “the hope of succeeding” upholds them.

As we discussed several months ago, that hope of succeeding rests on what economist J.K. Galbraith called “the extreme brevity of the financial memory.” Part of that brevity rests on ignoring the forest for the trees, and failing to consider movements further up the mountain in the context of how far the stone typically falls once it gets loose. It bears repeating that the average, run-of-the-mill bear market decline wipes out more than half of the preceding bull market advance, making the April 2010 S&P 500 level in the 1200’s a fairly pedestrian expectation for the index over the completion of the current market cycle. A decline of that extent wouldn’t bring valuations close to historical norms, and certainly not to levels that would historically represent “undervaluation.” But consider that a baseline expectation, and don’t be particularly surprised if the market loses closer to 38% - which is the average cyclical bear market loss during a secular bear market period. A market loss of about 50% would put historically reliable valuation metrics at their historical norms, though short-term rates near zero would seem inconsistent with a move to historically normal valuations with typical (~10% annual) expected total returns, absent other disruptions.

The simple fact is that the completion of the present market cycle might be better, or it might be worse than historic norms. We know that we don’t want to speculate here in any event, but neither a severe market loss nor a move to “undervaluation” is a requirement for us to encourage market exposure. For our part, we would expect to shift to a significantly constructive position on a meaningful retreat in valuations – even if to still-overvalued levels – coupled with an early improvement in key measures of market internals.

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Despite the inevitability of the descent of Sisyphus’ stone following these peaks, that inevitability should be the source of great optimism – not for current opportunities, but for future ones. Those with fidelity to informed discipline need only remain in the present moment, responding to the evidence as it changes, without needing to judge advances or declines as fortunate or unfortunate. The benefits of that discipline emerge over the course of the cycle even if some events seem unwelcome. Likewise, the existentialist Camus understood the cycle of things, and properly recognized the value of even the descent, without needing to judge it as tragic:

“If the descent is thus sometimes performed in sorrow, it can also take place in joy. There is no sun without shadow, and it is essential to know the night. I leave Sisyphus at the foot of the mountain! One always finds one’s burden again. But Sisyphus teaches the higher fidelity that negates the gods and raises rocks. The struggle again toward the heights is enough to fill a man’s heart. One must imagine Sisyphus happy.”

Instant Karma

I’m sometimes viewed as an evil quant, sitting in a dimly lit room, stroking a hairless cat ironically named Mr. Whiskers, and hoping for the worst. That’s undoubtedly because of my view that all of the market’s gains since roughly April 2010 are likely to be wiped out in a rather ordinary completion to the present market cycle, coupled with my broader criticisms of Fed-induced speculation and other ill-conceived policies. If you’ve been with us for a while, you know that I take no joy in market plunges, and my adamant concern about severe losses this time around reflects an extreme discomfort with having been right about the other two 50% losses in recent memory (not to mention becoming constructive in-between, though my fiduciary stress-testing inclinations in 2009 clearly did us no good in the face of QE – see Setting the Record Straight for the full narrative). Some also have the impression that our objective is to talk the markets down, in a way that interferes with their bullish outlook.

The reality is this. While we certainly hope to provide evidence and data sufficient for disciplined investors to maintain their confidence in our full-cycle approach, we have no particular desire to convert disciplined buy-and-hold investors or reckless speculators to our views (though I do think “buy-and-hold” investors with horizons shorter than 7-10 years have poorly matched their strategy with their objectives). Meanwhile, given that the majority of my income is directed to charity, I have a rather vested interest in doing good for others over time (undoubtedly, my particular focus on finance and autism research demands unusual patience, long horizons, a deep respect for evidence, and no expectation that progress evolves smoothly).