John Hussman: Market Poised for High Returns

Excerpt from the Hussman Funds' Weekly Market Comment (10/13/08):

1) How many people do you know whose bank has failed and have had any difficulty recovering their deposited funds? Anyone?

2) Do you personally know anyone whose money market fund has “broken the buck” and has not received the full assurance of the government that their claims will be paid in full?

3) Have you yourself had any difficulty making any transaction (not tightly related to your personal credit rating) in any aspect of daily life such as credit card purchases, grocery, gas, shopping, or for any other purpose?

The point of these questions is certainly not to deny that credit – particularly commercial paper and interbank lending – is extraordinarily tight. These markets are quite short-term in nature; generally between overnight and 30-60 days, but they are also markets in which central banks are providing extraordinary amounts of liquidity to ease those constraints. Rather, the point of these questions is to to remind investors that upon reflection, virtually all of the panic that people have about the credit markets is borne of fearmongering, and not based on personal experience. This crisis has certainly caused major difficulties for the owners and employees of unsound institutions, but generally speaking, the customers have not been affected...

Word to the wise - don't accept advice or analysis about this crisis from anyone who failed to anticipate it in the first place. The people warning about Depression now (or even talking about it casually on the financial channels) are the same reckless jackasses who told investors that stocks were cheap and “resilient” at the highs...

My impression is that investors who abandon properly diversified and carefully planned investments here, with the stock market already down by nearly half, will regret it as the emotionally panicked decision that wrecked their retirement prospects.

Long-term shareholders will recognize the following chart, which is an update of our 10-year total return projections for the S&P 500 Index ( standard methodology ). The heavy line tracks actual 10-year total returns. Note that the total return for the past decade has been zero, right in the mid-range of what we projected at the time. The green, orange, yellow, and red lines represent the projected total returns for the S&P 500 assuming terminal valuation multiples of 20, 14 (average), 11 (median) and 7 times normalized earnings. Stocks are now at the same valuations that existed at the 1990 bear market low. Relative to 30-year Treasury yields, the S&P 500 is priced to deliver the highest excess return since the early 1980's.

Comments

[whidbey:]

Interesting statistic on the comparative earnings historically, however I am suspicious that the relationships is meaningful since confidence, buyer resources and government policy are all significantly different. If you like the equities here you will love them later after the next leg down. I like your work, but I think it is not complete, nor do I know how to suggest how you improve the comparisons. Thank you.

2008 Oct 14 05:47 PM

[Moses:]

I know a lot of people who pertaining to question 3. I also know of a lot of job cuts and losses in my area. I think your blind optimism is leading you down a path of denial...

2008 Oct 14 07:32 PM

[veeblefetzer:]

Yes to number 2

2008 Oct 14 08:25 PM