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Executive Summary

Every stock market cycle in history has had both a bull (upside) and bear (downside) to it. The challenge is always in calling the correct change in direction. This week’s commentary includes excerpts from Dr. John Hussman’s June 2024 market comment titled “You Can Ring My Bell.” Current valuation extremes combined with what Hussman calls unfavorable market internals and various warning syndromes create a substantial downside risk. He estimates markets could correct 50-70% through the completion of the cycle. Please look at his data as to why he is calling the top.

Please continue to The Details the complete commentaries on the employment situation.

“Ring out the false, ring in the true.”
–Alfred Lord Tennyson

The Details

Frequent readers know that I often draw upon the research of Dr. John Hussman. Dr. Hussman engages in some of the most thorough research in the industry. Much of his research involves examining historical outcomes based upon varying conditions. His recent Market Comment entitled “You Can Ring My Bell” describes in detail his take on present conditions. In this newsletter, I will provide excerpts from his Comment, but I encourage you to read it in its entirety here (Emphasis is mine)

“I may as well just say it. Based on the present combination of extreme valuations, unfavorable and deteriorating market internals, and a rare preponderance of warning syndromes in weekly and now daily data, my impression is that the speculative market advance since 2009 ended last week. Barring a wholesale shift in the quality of market internals, which are quickly going the wrong way, any further highs from these levels are likely to be minimal. In contrast, current valuation extremes imply potential downside risk for the S&P 500 on the order of 50-70% over the completion of this cycle. […]

Taken as a whole – extreme valuations, divergent market internals, overextended market action, euphoric sentiment, tepid participation, deteriorating leadership, and other warning signs – the current set of market conditions provides no historical examples when stocks have followed with decent returns. Instead, the ‘nearest neighbors’ are either major market peaks or extremes that preceded steep corrections. […]

The present level [of valuations] exceeds both the 1929 and 2000 extremes, and is higher than every point in history except 5 weeks surrounding the January 2022 market peak.”

Bob here, the graph below estimates the forward 12-year total return of the S&P 500 above Treasury bonds. Every blue dot represents an actual historical occurrence. The current estimate calls for a -9.8% (yes that is negative) total return in excess of Treasury bonds over the next 12 years. Now, back to the excerpts.

“Again, valuations are not equivalent to forecasts, particularly over the near term. Still, current levels, along with historical experience over complete cycles, may help to explain why we estimate that potential full-cycle downside risk may be on the order of 50-70%. As Don Hays used to say, ‘Valuation doesn’t tell you when, but it does tell you how far.’ (h/t Paul Kostyak) […]

I often describe the combination of elevated valuations and unfavorable market internals as a ‘trap door’ situation, because steep losses tend to emerge from that combination, including 1987, 2000, 2007, late-2018, early-2020, and 2022 among others. Yet as we’ve seen in recent months, even unfavorable internals don’t label extremes or identify the points of most extreme risk. […]

I don’t think it’s generally possible to identify market peaks and troughs in real-time, but there are unusual points in history when one observes a sudden deluge of conditions that suggest a speculative climax or risk-averse capitulation. […]

A portion of this discussion is drawn from the June 2021 comment, Alice’s Adventures in Equilibrium

The whole concept of glamour stocks is a perfect reproduction of 1929, and to an extraordinary extent, the industries are the same. In 1929, the glamour stock was an electronic concern – RCA – although the word electronics had not been invented. Investors felt there must be magic in any industrial process they did not understand, and they still feel that way.

— John Kenneth Galbraith, New York Times, May 3, 1970 […]

Consider the tech bubble. During the 1990’s investment in information technology and software exploded, and looked nearly parabolic by the 2000 peak. Investors and much of Wall Street extrapolated this parabolic growth. Instead, the breathtaking growth fizzled over the next few years, and despite all of the innovation since, information technology and software investment remains a smaller share of the economy than at the peak of the tech bubble. There’s little doubt that investors are doing the same kind of extrapolation with a new batch of glamour companies today. […]

From the September 1929 peak to the nadir of the Great Depression in the summer of 1932, the Dow industrial average dropped from 381 to 36, or just over 90 percent. From the December 1968 peak to the May 1970 bottom, the same index dropped from 985 to 631, or about 36 percent. But, as we have had occasion to note before, that standard really will not do. As a rough modern counterpart to what Dow represented in the old days, [Dun’s Review] made a list of thirty leading glamour stocks of the nineteen sixties – ten leading conglomerates, ten computer stocks, and ten technology stocks. The average 1969-1970 decline of the ten conglomerates had been 86 percent; of the computer stocks, 80 percent; of the technology stocks, 77 percent. Such were the bitter fruits of the go-go years.

– John Brooks, 1973, The Go-Go Years”

Bob again, the preponderance of evidence seems to illustrate that the peak of this long drawn-out “Everything Bubble” could be nearby. If history is any guide, the correction needed to realign prices with revenues could be substantial. Just like prior massive bubbles, those unprepared could face devastating consequences.

The S&P 500 Index closed at 5,465, up 0.6% for the week. The yield on the 10-year Treasury 

Note rose to 4.26%. Oil prices increased to $81 per barrel, and the national average price of gasoline according to AAA remained at $3.45 per gallon.


© 2023. This material was prepared by Bob Cremerius, CPA/PFS, of Prudent Financial, and does not necessarily represent the views of other presenting parties, nor their affiliates. This information should not be construed as investment, tax or legal advice. Past performance is not indicative of future performance. An index is unmanaged and one cannot invest directly in an index. Actual results, performance or achievements may differ materially from those expressed or implied. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy.

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