Fund manager John Hussman is still sceptical of the rally. But he’s also smart enough not to bet the farm on an impending crash (or, for that matter, further gains):
Although the stock market’s advance since March is taken as evidence that the economy is on the mend, the extent of that advance represents just over one-third of the prior bear market loss, which is somewhat standard (if not reliable or predictable) for bear market rallies. Interestingly, the advance since March has almost exactly matched the size and duration of the rally that followed the initial market plunge in 1929, just before the stocks and the economy suffered fresh deterioration.
That’s not to say that we are assuming that stocks are still in a bear market. Nor do we assume that they are in a bull market. I don’t think we can rule out a further advance, nor should we rule out a fresh loss from these levels of over 40%, extending well into next year, before this adjustment is durably behind us. We aren’t investing on either as an expectation. As I’ve noted before, the bull/bear distinction is not a useful concept except in hindsight. The prevailing status is not observable in real time, so we rely instead on variables that are continuously measurable, focusing on full-cycle performance, and accepting that hindsight will only sometimes be kind to our assessment, and will sometimes be utterly cruel.
The recent rally never recruited the sort of price-volume sponsorship that has usually occurred very early on in prior bull markets, and we have been defensive in recent months (other than a periodic but helpful allocation to index call options). The evolution of the market’s advance to recover a full one-third of the market’s prior losses has been frustrating given that position…
To remove our hedges here in anticipation of a sustained economic recovery and bull market would be to assume that the events in the economy since 2007 have been psychological and temporary, that there will be no material effects from continuing delinquencies and foreclosures (not to mention the second wave of reset pressures due to begin later this year), and that the Fed can create more base money in one year than in the entire history of the nation, without any consequence. If we could treat the recent downturn as a “standard recession,” that might be possible. But little is standard about this downturn, and the fundamental difficulties have deeper roots than trend-following investors seem to assume.
That said, we can’t ignore the potential for investors to continue to speculate for a while, despite tepid price-volume sponsorship and deep-rooted economic challenges.
Translation: I’m still bearish as hell, but I’m not going to let you fools bankrupt me in the meantime.
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