One Tier And Rubble Down Below

John Hussman profile picture
John Hussman


  • One of the most common justifications for elevated stock market valuations here is the idea that "high stock market valuations are justified by low interest rates."
  • First, investors should understand that the present combination of low interest rates and elevated stock market valuations implies low prospective returns on the entire portfolio mix.
  • One of the popular objections to our analysis of valuations and subsequent market returns is that we observe certain periods where actual market returns were much higher than those that one would have projected based on valuations 12 years earlier.
  • Continuing our analysis, it's worth emphasizing that if interest rates are low because growth rates are low, no valuation premium is "justified" by those low interest rates at all.
  • Finally, it's useful to consider the relationship between the expected return on stocks and the expected return on bonds; a difference that's often called the "equity risk premium" or ERP.

The Nifty Fifty appeared to rise up from the ocean; it was as though all of the U.S. but Nebraska had sunk into the sea. The two-tier market really consisted of one tier and a lot of rubble down below. What held the Nifty Fifty up? The same thing that held up tulip-bulb prices long ago in Holland - popular delusions and the madness of crowds. The delusion was that these companies were so good that it didn't matter what you paid for them; their inexorable growth would bail you out.

- Forbes Magazine, 1977, The Nifty Fifty Revisited

Blue Chip Performance: 1973-1974
Du Pont -58.4%
Eastman Kodak -62.1%
Exxon -46.9%
Ford Motor -64.8%
General Electric -60.5%
General Motors -71.2%
Goodyear -63.0%
IBM -58.8%
McDonalds -72.4%
Mobil -59.8%
Motorola -54.3%
PepsiCo -67.0%
Philip Morris -50.3%
Polaroid -90.2%
Sears -66.2%
Sony -80.9%
Westinghouse -83.1%

We forget.

One of the striking things about bull markets is that they often end in confident exuberance, while simultaneously deteriorating from the inside. We've certainly observed this sort of selectivity during the past year. The market advance in 2019 fully recovered the market losses of late-2018, fueled by a wholesale reversal of Fed policy, hopes for a "phase one" trade deal, and as noted below, a bit of confusion about what actually constitutes "quantitative easing."

Yet for all the bullish exuberance, speculative enthusiasm, and fear-of-missing-out (FOMO) we've observed among investors in recent weeks, and indeed, in the past two years, the fact is that a pullback of just 11% in the S&P 500 would place the total return of the S&P 500 Index behind the return on Treasury bills since the January 26, 2018 market high. Given current overextended extremes, the entire gain of the S&P 500 since early-2018 could be given up in a handful of trading sessions.

Recall, for example, that the S&P 500 lost 11% in the 15 sessions following the March

This article was written by

John Hussman profile picture
Dr. John Hussman is the president and principal shareholder of Hussman Econometrics Advisors, the investment advisory firm that manages the Hussman Funds ( He holds a Ph.D. in economics from Stanford University, and a Masters degree in education and social policy and a bachelors degree in economics from Northwestern University. Prior to managing the Hussman Funds, Dr. Hussman was a professor of economics and international finance at the University of Michigan. In the mid-1980's, Dr Hussman worked as an options mathematician for Peters & Company at the Chicago Board of Trade, and in 1988 began publishing the Hussman Econometrics newsletter. Virtually all of Dr. Hussman's liquid assets are invested in the Hussman Funds. Note: Dr. Hussman is not an active contributor to Seeking Alpha; rather, SA editors excerpt regularly from Dr. Hussman's public commentary.

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