Last week, Lakshman Achuthan of the Economic Cycle Research Institute (ECRI) made the rounds on financial television to discuss the current state of their recession call from late last year. Achuthan essentially reaffirmed their belief that a return to economic contraction is likely in 2012, noting that the coincident data used to officially define economic cycle boundaries continue to signal slowing growth despite the optimistic mainstream view.
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He also mentioned the historic liquidity operation in progress at the Federal Reserve that continues to drive a massive increase in the money supply as shown on the following long-term graphs of M0 and M1.
Unfortunately, as we discussed recently, these massive liquidity injections are not engendering a comparable increase in economic activity as the velocity of money continues to plunge and the money multiplier remains well below 1.0.
Although most market participants have come to believe that the risk of an imminent return to economic contraction is negligible, the data trends that we value continue to indicate that the recession scenario is not only viable, but likely as well. Consequently, the cyclical bull market in stocks from early 2009 is at risk for a substantial decline at this late stage of its development. Additionally, even if you remove economic considerations from the analysis, stocks are currently priced to deliver poor investment returns. The following graph from a recent weekly commentary at Hussman Funds displays the projected and actual 10-year total returns of the S&P 500 index during the last 70 years.
This methodology, based primarily on valuations, has performed very well historically, and it currently projects that the S&P 500 index is priced to deliver a total annual return of 4.3 percent during the coming decade. Therefore, regardless of the cyclical outlook for the US economy, the investment outlook for stocks is very poor at the moment. Inevitably, as the secular bear market from 2000 continues to drive violent cyclical moves in both directions, there will come a time when stocks are priced to deliver excellent long-term returns, but that time is not now.