John Hussman: Has the Market Reached Final Lows?

Excerpt from the Hussman Funds' Weekly Market Comment (6/30/08)

If current levels were to turn out, in hindsight, to be the final lows of this decline, I suspect that the overall return over the next cycle (by the time we do observe a full 20% loss) will be as tame as we've seen since 2003. Over the past 5 years, still with no 20% bear market completed, the total return of the S&P 500 Index has averaged 7.5% annually.  A market low here and now would compete with the 2002-2003 lows for the highest valuation observed at a cyclical market trough. Suffice it to say that the decline has improved prospective long-term returns, but the most likely 10-year return for the S&P 500 (standard method) is still only in the range of 3-6% (with -0.5% and 8.5% as the extreme bounds except in the event of a 2000-type bubble or a 1974-type trough).

On the bright side, the dismal 2.85% annual total return of the S&P 500 over the past decade has actually exceeded the return of roughly 0% that we projected a decade ago, so maybe we'll get equally lucky over the coming decade. My preference would be a standard, run-of-the-mill bear market of about 30% from last year's highs, which would give us a good chance at long-term returns closer to 9% annually.

[Legend: the dark blue line depicts the actual 10-year annual total return of the S&P 500 Index. The four bands represent projected returns based on sustained long-term earnings growth at a 6% annual peak-to-peak rate, coupled with terminal valuation multiples on mid-channel earnings of 7, 11, 14 and 20, representing trough, median, average and peak multiples on that measure.]

 

Comments

[NotaComplet...:]

So do you think the market has hit its lows or not??

2008 Jun 30 01:46 PM

[Jim Hawthorne:]

Thanks, John! (was this a rhetorical question?)
I know that c-wisdom (and that's ALL it is!) stubbornly insists that bear markets end when we hit a 20% drop, I have always considered that to be nonsense.
Bear markets end when we finally get some serious bid action, and the MA's out to 150 days turn positive.
The last "bear" (note the lower case 'b') market ended as a result of the convulsive processes that went from October 2002 through March 2003.
If you look back over time you'll see that there is rarely (no... never) a definitive date marking the end of bear markets! Nor is there ever a definitive date marking their beginning!
We'll all know when this Bear Market has ended when the 5,15,25,50,100, and 150 and 200 day MA's are all going up!
That is NOT to suggest that there will not be many, many great opportunities both long and short for the nimble and flexible trader! It does NOT imply that you should wait like a vestal virgin for the perfect market entry!

The operative words are nimble and flexible! Be nimble and flexible, and you won't have to worry and fret about calling either market tops or market bottoms!!!!

Good luck, and good hunting!

2008 Jun 30 08:24 PM

[Bear Stocks...:]

Market lows still ahead. Stay short with inverse ETFs like QID and PSQ. We've been short-selling stocks like HUN, LEH, GM, OSK, CTX, AIG, LEN, PACW, LFG, XL during the past 4-5 weeks.

2008 Jul 01 09:43 AM