'Valuations are highly informative about long-term returns on a 10-12 year horizon, and potential downside risks over the completion of a given market cycle. Alone, however, they are often not informative at all about near-term outcomes over shorter portions of the market cycle. For that, one has to consider the preferences of investors toward speculation or risk-aversion, which we infer from the uniformity or divergence of market internals across a broad range of securities.
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..In my view, the adjustment in growth expectations is likely to be profound in the coming years. Given current valuation extremes, the associated market losses are likely to be predictably brutal.'<blockquote>'Put simply, within a small number of years, investors are likely to discover that they have allowed their assumptions about growth in U.S. GDP, corporate revenues, earnings, and their own investment returns to become radically misaligned with reality, and that Wall Street’s justifications for the present, offensive level of equity market valuations are illusory. Based on outcomes that have systematically followed prior valuation extremes, the accompanying adjustment in expectations is likely to be associated with one of the most violent market declines in U.S. history, even if interest rates remain persistently depressed.
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Again, it’s possible that the level of interest rates will remain quite depressed. But even that outcome would likely be the result of persistently disappointing economic growth. Any discounted cash flow method will inform investors that if interest rates are low because expected growth is also low, no valuation premium is “justified” by that combination. Suffice it to say that I don’t believe that quantitative easing or low interest rates have ushered in a durable change in the relationship between reliable valuation measures and subsequent market returns. In my view, investors are going to lose terribly on the gamble of their financial future that they’ve entrusted to central banks.
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Valuations are highly informative about long-term returns on a 10-12 year horizon, and potential downside risks over the completion of a given market cycle. Alone, however, they are often not informative at all about near-term outcomes over shorter portions of the market cycle. For that, one has to consider the preferences of investors toward speculation or risk-aversion, which we infer from the uniformity or divergence of market internals across a broad range of securities.
Notably, not only do investors face obscene valuations, but market internals are presently both unfavorable and deteriorating. This is a critical feature here, because it suggests increasing risk aversion among investors. The signals we extract from market internals aren’t always mirrored in simple, widely-followed measures like moving averages or advance-decline lines. At present, however, the dispersion and deterioration in market internals is no longer subtle, and can be observed in very straightforward ways. For example, as of last week, more than 50% of U.S. stocks have now declined below their respective 200-day moving averages.
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..In my view, the adjustment in growth expectations is likely to be profound in the coming years. Given current valuation extremes, the associated market losses are likely to be predictably brutal.'
- John P. Hussman, Ph.D.,
Imaginary Growth Assumptions and the Steep Adjustment Ahead, August 21, 2017</blockquote>
Context<blockquote>
'..the scourge of unsound money and inflationism has been so subtle that it goes virtually undetected..'</blockquote>