John Hussman On Gamblers In Unfavorable Market Climates

by: John Hussman

Excerpt from fund manager John Hussman’s weekly essay on the US market:

Suppose that there was a certain casino where the slot machines were “loose” enough during the week that they actually produced a positive average payoff. But say that on the weekends, they were tightened enough that patrons would generally walk out with less money than they walked in with. Given that knowledge, it would make sense to play the slots during the week, but to just avoid them on weekends.

If you were to visit on a weekend, however, you'd inevitably see a certain number of people winning, and possibly winning substantial amounts. While that observation might encourage a novice to play, in hopes of hitting a jackpot, the key fact would remain that the victories one observes on the weekends a) can't be predicted, and b) are outweighed, on average, by losses.

A good gambler in this case would be one who played the slots during the week, and ignored them on the weekends, despite the fact that there were occasionally a few winners on the weekends.

The same is true with an unfavorable Market Climate. The fact is that broad market risk is presently not likely to produce an acceptable return/risk profile, on average. But nothing in this prevents the market from enjoying periodic rallies, some even to marginal new highs.

While the market's apparent strength despite rising interest rates, high oil prices, and dollar weakness is being commended as a sign that “the market wants to go higher,” it's also equally possible that more substantial market weakness is ahead and that the other shoe just hasn't dropped yet. For our part, we don't rely on market weakness here, but neither do we rule it out as an important possibility.