Not verbatim, of course — they write in different idioms — but it seems that, for Dr. Hussman as well, the forecast calls for pain. From Hussman’s weekly market commentary (“Extend and pretend”):
Investors have chased risky securities over the past year to the point where the risk premium for default risk has eroded to the levels we saw at the peak of the credit bubble in 2007. My sense is that this is a mistake that will be painfully corrected. Investors now rely on a sustained economic recovery and the absence of any additional credit strains – and even then would be likely to achieve only tepid long-term returns from these levels.
Here’s Robert Cray’s forecast, via YouTube:
That quote above the video wasn’t the most interesting part of Hussman’s market commentary today to me. I just quoted it for the Robert Cray tie-in. I found this part more interesting, where Dr. Hussman essentially seconds Vitaliy Katsenelson’s secular range-bound market thesis (although Dr. Hussman uses the more intuitive term “secular bear market”):
If you look at the performance of the stock market on a long-term historical basis, you’ll observe that there are alternating periods of “secular” bull and bear trends, which are essentially driven by long transitions between unusually high valuation multiples and unusually low valuation multiples. “Secular” bear markets (which have generally lasted 17-18 years in U.S. data) are periods where the market begins from a very rich level of valuations, and then experiences several individual bull-bear cycles, but where each successive bear market typically achieves a lower level of valuation (though not necessarily a lower absolute price trough, if earnings and other fundamentals grow). Overall, the market provides little durable return over the full period. The last secular bear market period ran from the valuation peak of the mid-1960’s to the valuation trough of 1982 – essentially a 17 year period. The last secular bull market ran from 1982 to 2000.
I suspect that the secular bear market that began at the valuation peak of 2000 is incomplete. As of last week, the S&P 500 remained strenuously overvalued on the basis of normalized fundamentals. From that perspective, even if the trough we observed in March 2009 was the ultimate price low of the secular bear market since 2000, it’s not likely to represent the ultimate valuation trough. Given the current state of valuations, and the likelihood of several years of additional credit deleveraging, it seems that economic conditions, valuations, and the typical duration of secular bear markets converge on the likelihood of several more years of interesting but unrewarding market volatility. Secular bull market periods tend to begin with quite low multiples to normalized earnings (historically, on the order of 7), which is what provides the platform for a very long period of subsequent gains. It would not be surprising to observe a sequence of cyclical movements comprising a bear-bull-bear series, ending with a final and uncomfortable valuation trough (perhaps 6-8 years from now) before the market is finally priced to deliver that sort of sustained “secular” period of long-term gains. Current valuations provide no such platform.
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