By David Berman
Monday’s stock market looks like a conclusion to last week’s extreme volatility. As the trading day winds down, the Dow Jones industrial is up 180 points, or 1.6 per cent, to 11,449 – up 4 points since Standard & Poor’s downgraded the U.S. credit rating on Aug. 5, beginning a period of six triple-digit moves for the Dow.
While long-term investors are no doubt breathing sighs of relief and nimble investors who loaded up on shares during last week’s darkest moments might be counting their profits, at least one bearish commentator is sticking to his belief that markets are by no means in the clear.
“Short-term measures of market action became extremely oversold mid-week, and investors took the Fed's latest statement as an occasion to launch a fairly typical ‘fast, furious, prone-to-failure’ rally to clear those conditions,” said John Hussman of Hussman Funds, in his weekly note to clients. “Beyond that, however, the full ensemble of evidence remains negative at present, and we remain defensive as market internals have collapsed....”
That is, his proprietary recession warning is flashing red, credit spreads look like 2008, financial advisers are still too bullish and stock valuations are still too rich. He could change his tune on stocks, but that would take a deeper stock market decline combined with a turn toward bearish sentiment.
He agrees with GMO’s Jeremy Grantham that the fair value of the S&P 500 is about 950 (it's is now at 1,201) and thinks investors should consider themselves fortunate if the index doesn’t fall to that level within the next 12 to 18 months.
“Wall Street continues its servile attachment to forward operating earnings, seemingly unconscious that the perceived 'norms' for the resulting P/E are artifacts of a bubble period,” he said. “The fact is that historical periods of overvaluation and poor subsequent long-term returns correspond to forward operating P/E multiples anywhere above 12, while secular buying opportunities such as 1950, 1974 and 1982 map to forward operating multiples of only 5 or 6.”
