Excerpt from the Hussman Funds' Weekly Market Comment (5/5/08):
Investors really have no sense of market dynamics if they believe that a recession-linked bear market comprises a single decline of less than 20% followed by a “V” shaped rebound into a new bull market. While I don't expect the market's losses to be nearly as severe as they were in the 2000-2002 bear market, the simple fact is that if the recent market low was indeed a final bear market trough, it occurred at the highest valuation level of any prior bear market trough in history.
I don't want to convey the impression that the market cannot advance further as a result of speculative pressures, but at present, the S&P 500 remains priced to deliver probable total returns of about 2-4% annually over the coming decade (a decade ago, using the same methodology, the projected return was in the range of 0-2%, which is about what we've observed). I do not hope for a steep market decline, but it is effectively the only way for stocks to be priced to deliver meaningful long-term returns.
Apart from the belief that potential losses are presently not likely to be as deep as in 2000-2002, my views about the current cycle are very much in line with the views I had following the bear market rally in January 2001, which, in hindsight, occurred very early into the downturn. Household debt now exceeds GDP for the first time in history, while total credit market debt is about 350% of GDP. Considering the rising default rates on the mortgage portion of that, and the risk that profit margin compression will endanger the debt-service coverage of marginal corporations, it's difficult to have a great deal of optimism that current difficulties will leave investors as unscathed as analysts widely suggest...
I do recognize that many investors are bullish on the basis of commodities, fertilizer, basic materials and all sorts of scarcity-oriented investment themes. There are plenty of ways for investors to speculate on that sort of theme if they believe that “this time it's different” and we have entered a new world of permanent global shortages (no reason to convince me of it – just speculate elsewhere). As for me, I continue to believe that the best long-term investment opportunities will come from well-run companies with reasonable valuations, financial stability, and creative, useful products, just as durable long-term investment opportunities always have. So while investors clamor to buy stocks that fit into a pessimistic theme of global scarcity, famine and energy shortages, I'm frankly too optimistic to be bullish here.