Wall Street’s recent optimism is premature, says fund manager John Hussman. He thinks we’re only at the beginning of a significant slowdown:
…the fundamentals continue to appear very poor, but market action is at something of a crossroads. The reality is that as recessions develop (and I continue to believe the U.S. faces a much more significant downturn than we’ve observed to date), the data can take months to accumulate to a compelling verdict, and in the meantime, speculative pressures can remain alive.
Hussman suggests that the kinds of metrics which have recently produced upside surprises are exactly the kinds of gauges that tend not to turn negative until the economy moves deeper into a recession:
[T]he kinds of indicators that investors are looking to for verification of a recession (spiking unemployment, negative GDP reports, bankruptcies, margin-related cost cutting, etc) are generally seen further into a recession than we probably are.
In short, Hussman believes that the recent runup in prices is a case of speculation feeding on speculation:
The S&P 500 currently trades at 22.9 times trailing net earnings, but these earnings are somewhat depressed and not representative of normal long-term earnings power. What is more important is that the S&P 500 presently trades at over 20 times normalized earnings (sustainable earnings at normal profit margins). More friendly price/earnings multiples on the basis of “forward operating earnings” or even price-to-peak-earnings are had only on the assumption of a remarkable earnings rebound in the second-half, or a permanent return to the record-high profit margins of recent years.