Excerpt from the Hussman Funds' Weekly Market Comment (12/10/12):

We continue to view the stock market as being in a “secular bear” – a period that includes a series of separate “cyclical” bull and bear markets, with the defining characteristic that successive bear market troughs move toward increasingly depressed levels of valuation. Secular bears begin from elevated valuations – generally Shiller P/E’s well above 18 (the ratio of the S&P 500 to the 10-year average of inflation-adjusted earnings), and typically end about 14-18 years later, at depressed valuations and after a number of separate market cycles. There are certainly many periods during a "secular" bear market when it makes perfect sense to take moderate and even aggressive "cyclical" risks, but it is worth noting that the average "cyclical" decline in a "secular" bear has wiped out about 80% of the prior bull market advance.

As a severe example of

Excerpt from the Hussman Funds' Weekly Market Comment (11/26/12):

In the day-to-day focus on the “fiscal cliff,” our own concern about a U.S. recession already in progress, and the inevitable flare-up of European banking and sovereign debt strains, it’s easy to overlook the primary reason that we are defensive here: stocks are overvalued, and market conditions have moved in a two-step sequence from overvalued, overbought, overbullish, rising yield conditions (and an army of other hostile indicator syndromes) to a breakdown in market internals and trend-following measures. Once in place, that sequence has generally produced very negative outcomes, on average. In that context, even impressive surges in advances versus declines (as we saw last week) have not mitigated those outcomes, on average, unless they occur after stocks have declined precipitously from their highs. Our estimates of prospective stock market return/risk, on a blended horizon from 2-weeks to 18-months, remains among

Excerpt from the Hussman Funds' Weekly Market Comment (11/19/12):

In the Mary Mapes Dodge book titled Hans Brinker, there is a fictional story within the story of a little Dutch boy who, on his way to school, notices a hole in the dyke. Having nothing else to fix the leak, he plugs the hole with his finger and stays there through the night until workers come to repair it. We are now into the fourth year of efforts to print trillions of little Dutch boys out of dollars and euros in order to stop a tide from crashing through a fundamentally damaged dyke. All of this has bought time, but no workers have arrived, and no real repairs have been done.

The holes seem only loosely related: non-performing mortgages, widespread unemployment, massive U.S. budget deficits, a “fiscal cliff” sideshow, inadequate European bank capital, European currency strains, a surge

Excerpt from the Hussman Funds' Weekly Market Comment (10/1/12):

In the context of historical evidence and outcomes, present market conditions give us no choice but to remain highly defensive. Valuations remain rich on the basis of normalized earnings (which are better correlated with subsequent returns than numerous popular alternatives based on forward operating earnings, the Fed Model and the like). Investor sentiment is overcrowded on the bullish side even as corporate insiders are liquidating at a rate of eight shares sold for every share purchased – a surge that Investors Intelligence describes as a “panic.” Market conditions remain steeply overbought on an intermediate and long-term basis, with the S&P 500 still near its upper Bollinger bands (two standard deviations above the 20-period moving average) on weekly and monthly resolutions. We continue to observe wide divergences in market action, from century-old criteria such as the weakness in transports versus

Excerpt from the Hussman Funds' Weekly Market Comment (08/27/12):

One of the questions we often receive is why we don’t simply lift our hedges when the market advances above some moving average or another, and replace them when the market breaks below those moving averages. Certainly, when one looks a chart, extended market advances always break above various moving averages, and extended market declines always break below various moving averages, so simple trend-following strategies seem utterly self-evident. Unfortunately, if you actually take that strategy to historical data, the results typically aren’t nearly as compelling. Moreover, once any amount of slippage or transaction costs are taken into account, the most widely-followed strategies generally underperform a passive buy-and-hold strategy over time, and often don’t even manage downside risk particularly well.

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I am comfortable with the tracking risk that our own hedging strategy experiences because I believe that we can reasonably

"Excerpt from the Hussman Funds' Weekly Market Comment (7/30/12):"

The enthusiasm of investors about central-bank interventions has reached a pitch that is already well-reflected in market prices, and a level of confidence that with little doubt, investors will ultimately regret. In the face of this enthusiasm, one almost wonders why nations across the world and throughout recorded history have ever had to deal with economic recessions or fluctuations in the financial markets. The current, widely-embraced message is that there is no such thing as an economic problem, and no such thing as risk. Bernanke, Draghi and other central bankers have finally figured it out, and now, as a result, economic recessions and market downturns never have to happen again. They just won’t allow it, printing more money will solve everything, and that’s all that any of us need to understand. And if it doesn’t solve everything, they

Excerpt from the Hussman Funds' Weekly Market Comment (7/2/12):

In the first week of March, the U.S. stock market established a set of conditions placing it among the most negative 2.5% of historical observations (see Warning: A New Who’s Who of Awful Times to Invest) – a short list that includes the major peaks of 1972-73, 1987, 2000, and 2007. Since then, we’ve seen an increasing set of indicator syndromes that are associated with historically hostile market outcomes, maintaining us in a hard-defensive stance that is as rare as it is imperative. Last week, the market reconfirmed the “exhaustion syndrome” that I discussed several months ago (see Goat Rodeo). Prior to 2012, there were 112 weeks in post-war U.S. data where our investment strategy would have encouraged a similarly defensive position with that syndrome in place. Following those instances, the S&P 500 plunged at an average

Excerpt from the Hussman Funds' Weekly Market Comment (6/25/12):

In recent months, our measures of leading economic pressures have indicated the likelihood of an oncoming U.S. recession. Our view is based on the analysis of leading/coincident/lagging indicators (see Leading Indicators and the Risk of a Blindside Recession) as well as more statistical signal processing methods that extract "unobserved components" from noisy data (see the note on extracting economic signals in Do I Feel Lucky?). As Lakshman Achuthan at the ECRI has noted on the basis of different but related evidence, the verdict has been in for a while. The interim has been little more than waiting for the coincident data to catch up to the leading evidence that is already in place.

This wait is by no means over. As Achuthan has observed, economic data such as GDP and employment data are heavily revised over time.

Excerpt from the Hussman Funds' Weekly Market Comment (6/18/12):

With Greek elections resulting in a fairly benign outcome that promises to hold the euro together in the near-term, the market may enjoy some amount of relief. The extent and duration of that relief will be informative. Based on broader factors, we don't expect that relief to survive very long, but we are willing to respond more constructively if our own return/risk measures become more favorable.

Our estimate of the prospective return/risk tradeoff in the stock market remains in the most negative 0.5% of historical instances. That said - and this is important - if market internals improve meaningfully over the next few weeks (measured across individual stocks, industries, sectors and security types), our estimate of the market's prospective return/risk profile would improve, despite what we view as rich valuations and a new recession. Very roughly speaking, this would

Excerpt from the Hussman Funds' Weekly Market Comment (6/4/12):

Since late-February, our estimates of the market's prospective return/risk tradeoff (over a set of horizons from 2 weeks to 18 months) have persistently held in the worst 0.5% of all historical observations. It's always important to emphasize that we try to align ourselves with the average return/risk profile that has historically accompanied the particular set of investment conditions we observe at each point in time, but that the outcome in any specific instance may not reflect the average return, and may even fall outside of what we view as the likely range of outcomes. That said, the awful behavior of the market in recent weeks is very run-of-the-mill in terms of how similarly unfavorable conditions have usually been resolved historically, and there is no evidence that this awful prospective course has changed much. The chart I included three

Excerpt from the Hussman Funds' Weekly Market Comment (4/30/12):

The problem for the stock market is that the 13-year journey of underperforming T-bills - with wicked collapses and break-even recoveries - is most probably not over. Stocks remain overvalued on the basis of the probable long-term stream of cash flows they will deliver to investors, though the extent of this overvaluation is obscured by unusually high (but reliably mean-reverting) profit margins, which make current and forward P/E ratios seem pleasantly digestible.

There are two ways to think about this. One is to think of these rich valuations and low prospective returns as a durable feature of the market environment. That's basically the vision that PIMCO's Bill Gross recently suggested, noting that we have entered a period of "negative real interest rates and narrow credit and equity risk premiums; a state of financial repression as it has come to

Excerpt from the Hussman Funds' Weekly Market Comment (4/23/12):

We currently estimate the prospective 10-year total return on the S&P 500 at about 4.5% annually, in nominal terms, based on our standard valuation methodology. This may not seem bad, relative to 2% yields on the 10-year Treasury bond, provided that investors actually consider either figure to be an adequate 10-year investment return, and provided that they view 4.5% annual returns as adequate compensation for securities that have several times the volatility of a 10-year Treasury bond (especially when yields are low), and provided that investors ignore the fact that prospective market returns tend to enjoy a significant range over the course of the market cycle, so that "locking in" present prospective returns must necessarily forego any higher prospective return that might be observed in the coming decade. Even given robust growth in GDP and corporate revenues, a move to

Excerpt from the Hussman Funds' Weekly Market Comment (4/16/12):

As of Friday, the S&P 500 was at about the same level as at the end of February. I noted then that our estimate of potential market losses over an 18-month window was in the worst 1.5% of historical observations. More recently, we've observed a marked deterioration in our measures of market internals. As a result, our estimate of potential market losses over a 6-month window is now in the worst 0.5% of historical observations. In particular, we're seeing a very broad-based downward shift in market action across nearly every industry group. While the depth of the breakdown is still fairly shallow, the uniformity of the signal suggests significant information content (for more on this distinction, see the note on extracting economic signals from multiple sensors in Do I Feel Lucky?). Though our market concerns are independent

Excerpt from the Hussman Funds' Weekly Market Comment (4/9/12):

On Friday, the Department of Labor reported that March non-farm payrolls increased by 120,000, falling well short of consensus expectations in excess of 200,000. For our part, we continue to expect a deterioration in observable economic variables, with weakness that emerges gradually and then accelerates toward mid-year. On the payroll front, our present expectation is that April job creation will deteriorate toward zero or negative levels.

Immediately after the payroll number was released, CNBC shot out a news story titled "Disappointing Jobs Report Revives Talk of Fed Easing." Of course it does, because this remains a market dependent on sugar. And with little doubt the Fed will eventually deliver it - perhaps following a market plunge of 25% or more - but with little doubt nonetheless, because like the indulgent parent of a spoiled toddler, the FOMC can't stand to

Excerpt from the Hussman Funds' Weekly Market Comment (8/8/11):

As of Friday, the S&P 500 was below its level of early November 2010, when the Federal Reserve initiated its second round of quantitative easing. Aside from a brief bump in demand that kicked the recession can down the road a bit, the U.S. economy is not measurably better off. Meanwhile, countless individuals in developing countries have been injured by predictable commodity hoarding and global price instability. The Federal Reserve has leveraged its balance sheet by over 55-to-1. As policy makers look to address the abrupt deterioration in U.S. and global economic prospects, we should ask ourselves: Do we really long for more of the Fed's recklessness?

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If there is one crucial point that should not be missed, it is this: the fundamental source of our economic challenges, from joblessness, to unresolved housing strains, to sovereign debt crises,

Excerpt from the Hussman Funds' Weekly Market Comment (8/1/11):

The overall impression from the data suggests the possibility that there is more information in the recent breakdown in market internals than can be explained by debt ceiling concerns alone. On that note, there are emerging economic signals whose leading tendencies are strong enough to make a review worthwhile.

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The components of our recession warning composite might be called "weak learners" in that none of them, individually, has a particularly notable record in anticipating recessions. The full syndrome of conditions, however, captures a critical "signature" of recessions. That signature of "early warning" conditions is based on financial market indicators including credit spreads, equity prices and yield curve behavior, coupled with slowing in measures of employment and business activity. Every historical instance of this full syndrome has been associated with an ongoing or immediately impending recession.

The components (which I've

Excerpt from the Hussman Funds' Weekly Market Comment (2/15/11):

Last week, the S&P 500 Index ascended to a Shiller P/E in excess of 24 (this "cyclically-adjusted P/E" or CAPE represents the ratio of the S&P 500 to 10-year average earnings, adjusted for inflation). Prior to the mid-1990's market bubble, a multiple in excess of 24 for the CAPE was briefly seen only once, between August and early-October 1929. Of course, we observed richer multiples at the heights of the late-1990's bubble, when investors got ahead of themselves in response to the introduction of transformative technologies such as the internet. After a market slide of more than 50%, investors again pushed the Shiller multiple beyond 24 during the housing bubble and cash-out financing free-for-all that ended in the recent mortgage collapse.

And here we are again. This is not to say that we can rule out yet higher valuations, but

Excerpt from the Hussman Funds' Weekly Market Comment (1/18/11):

As a reminder of how we approach market valuation, we strongly believe that securities are a claim to a stream of future cash flows that can actually be expected to be delivered to investors over time. As a result, we have little sympathy (and history demonstrates little sympathy) for the popular but misguided practice of applying arbitrary valuation multiples to forward analyst estimates of earnings. Generally, these "forward earnings" estimates fail to normalize for fluctuations in profit margins, return on equity, and other factors that have historically driven short-term earnings temporarily above and below levels that that would have a stable, proportional relationship with the present value of subsequent cash flows. Forward operating earnings estimates are more volatile and more influenced by recent short-term behavior than can properly be used as a basis for valuation, and the resulting earnings "misses" can

Excerpt from the Hussman Funds' Weekly Market Comment (1/10/11):

If we are looking for policies to encourage economic activity such as real investment, the best approach is to create an environment that rewards the accumulation and productive allocation of savings. Instead, the Federal reserve is punishing savings by depressing the rates of return available on nearly every class of assets, while simultaneously ensuring that whatever scarce savings do emerge are misallocated to the most speculative pursuits.

Look historically, and you'll find that growth typically does not follow depressed or negative real interest rates, but instead usually follows high ones. High real interest rates are an inducement to save, and therefore encourage the accumulation of savings that can be allocated to productive investment. Undoubtedly, the situation is helped when many productive investment opportunities exist. In that event, real interest rates are also bid up by demand for funds to

Excerpt from the Hussman Funds' Weekly Market Comment (1/3/11):

One of the striking features of the market here is the extent to which large-cap, high-quality has underperformed speculative sectors of the market, creating what we view as a multi-year "setup" in favor of high quality issues.

A few weeks ago, I noted the wide dispersion between staples and cyclicals, which is evident within the S&P 500 itself. Extremes in the relative valuation of these sectors have typically been followed by strong subsequent reversion in the opposite direction favoring the depressed sector. Moreover, even if we take the whole S&P 500 as relatively "high quality," we can observe yet higher levels of speculation in small-cap indices such as the