Excerpt from fund manager John Hussman’s weekly essay on the US market:
I've noted before that a fully hedged investment position earns implied interest (generally somewhere between the 3-month Treasury bill yield and the broker call rate – currently just over 5% annualized), so that hedging will typically increase investment returns in periods when the market's total return falls short of risk-free interest rates, even if the market's total return is positive.
On that note, investors should recognize that since the 1960's, when the 10-year Treasury yield, the 3-month Treasury bill yield, and the Consumer Confidence index have all been rising (say, above their levels of 6 months earlier), the S&P 500 has underperformed risk-free T-bill yields by an average of -5.13% annualized, on average.
But it gets worse.
If we look at periods since 1975 when the Philadelphia Gold Stock Index [XAU] was also above its level of 6 months earlier, it turns out that the S&P 500 has followed with annualized losses of -12.37% on an absolute basis (nearly a -20% shortfall versus risk-free Treasury bill yields). All four conditions are true today.
Since Consumer Confidence is actually a lagging indicator that improves based on past changes in employment, factory use, and so forth, we can also look at periods when an economic expansion was already reasonably mature. Examining periods of upward yield pressure when factory capacity utilization was also above 80% (as it is now), the subsequent annualized total return for the S&P 500 drops to -19.00%.
You can mix-and-match these pressures to your heart's content. The more conditions required, the smaller the subset of events, but generally the poorer the returns.