John Hussman: Stock Durations Have Become Shorter

Includes: DIA, QQQ, SPY
by: John Hussman

Excerpt from the Hussman Funds' Weekly Market Comment (1/12/09):

In last week's market comment, I emphasized the shift in durations that we've observed in recent quarters, with stock durations plunging and bond durations getting much longer. The February 23, 2004 comment (Buy and Hold for the Duration?) contains an analytical discussion of duration and its importance, but the simple point here is that the longer the duration of an investment, the longer the investment horizon a passive investor requires in order to expect a reasonably predictable long-term return.


To give you some idea of the magnitude of the duration shifts we've observed lately, the following chart presents the duration (in years) of investments in the S&P 500 and 10-year bonds. I've placed them on separate scales since the duration of 10-year bonds is smaller, and has much less volatility than the duration of stocks.


Presently, the duration of stocks has fallen to about one-third of what it was in 2000. Stock durations aren't particularly low on a historical basis, but are out of the range that I've considered ridiculously dangerous since the late 1990's. In contrast, bond durations as of the end of 2008 were higher than at any time since the early 1950's, so that an investor in 10-30 year Treasury bonds is presently assured of a low yield-to-maturity if the bond is held for the long-term, while being at the mercy of market direction even to achieve that low rate of return.