The market rebound we’ve experienced is near an end, and we should have seen it coming, according to John Hussman of Hussman Funds.
Here’s a breakdown of why Hussman thinks that, even if you ignore questions about the banking system, this market is clearly in line for a correction.
- Investors have gone through two massive loss periods in the past 12 years, and only gained 2.4% if they tracked the S&P.
- Returns are going to be low over the next several years, and while there might have been a price low in March 2009, the valuation low has yet to be found. It may take another 6-8 years.
- This low return on the S&P is not the result of other potential crises looming in the system, including credit problems, but simple fundamentals.
- People are now buying into the market, relying on economic growth and the absence of another credit crisis, rather than on fundamentals.
As such, says Hussman:
This outcome is not dependent on whether or not we observe a second set of credit strains, but is instead baked into the cake as a predictable result of prevailing valuations. The risk of further credit strains simply adds an additional layer of concern here. 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.
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