S&P 500 Could Fall 60%: Hussman

Citing fundamentals, cash distribution, and valuation as the source of stock market gains, Wall Street analyst and fund manager John P. Hussman points out that, while historically high, all are drastically slowing to what many would call a point of no return. “Consider these drivers today. Combining depressed growth prospects with an S&P 500 dividend yield of just 2.0%, the likelihood is that over the coming 10-12 years, even a run-of-the-mill reversion of valuations will wipe out the entire contribution of growth and dividend income, resulting in zero or negative total returns in the S&P 500 Index on that horizon, with an estimated interim market loss on the order of -60%,” Hussman said in his post.

How Expensive Is the S&P 500?
The S&P 500 traded at a record high Monday, trading to within a few ticks of 2500. With this, it dragged the forward 12-month EPS to a record high and the 12-month price to earnings ratio to levels not seen since the pre-Dotcom era. But even these stretched levels don’t uncover the extent of the over-valuation. “Notice that the distinction between today and the 2000 peak is in the breadth of overvaluation across individual stock,” Hussman said in an August post.
“As of last week, with the exception of the richest decile of stocks, where median valuations were higher only during the January 2000-March 2001 period (followed by median losses exceeding -80% for those stocks), every decile of S&P 500 components is currently at or within 2% of its most extreme valuation in history.”
Arguments for a stock market correction clutter financial publications every morning. All will be correct at some point, but as Keynes said, in the long-run we’ll all be dead. But what’s different about this one is not just the magnitude of the correction, but where it begins. “During the journey of Empress Catherine II to Crimea, Prince Grigory Potemkin, the governor of the region, erected fabricated villages along the Dnieper river” That’s Wall Street analyst and fund manager John P. Hussman whose outlook is dire than any Wall Street bear going around. (See also: Bear Market Ahead: What 5 Big Investors Forecast)
Citing fundamentals, cash distribution, and valuation as the source of stock market gains, Hussman points out that, while historically high, all are drastically slowing to what many would call a point of no return. “Consider these drivers today. Combining depressed growth prospects with an S&P 500 dividend yield of just 2.0%, the likelihood is that over the coming 10-12 years, even a run-of-the-mill reversion of valuations will wipe out the entire contribution of growth and dividend income, resulting in zero or negative total returns in the S&P 500 Index on that horizon, with an estimated interim market loss on the order of -60%,” Hussman said in his post.

Hussman Isn’t the Only Doom-Sayer
While the extent of Hussman’s call is frightening, he is not alone in calling for a stock market correction. Deutsche Bank said recently that the probability of a recession is at the highest level in ten years saying a flattening yield curve means investors are bracing for tough times ahead by investing in longer term Treasuries, which has pushed the yield curve to levels last seen before the Great Recession.
The Number of Nay-Sayers Who Have Been Wrong Increases, But…
September 4 marked the 300th consecutive trading day the S&P 500 has been above its 200-day moving average, which is the 15th longest since 1923, and while valuations continue to stretch and the number of people calling for a correction grow, so does the number of those who have been wrong.
However, if Hussman is correct, then the Potemkin villages will, in fact, be as valuable as those pieces of paper representing the S&P 500: “temporarily glorious and impressive on the surface, but backed by much less than investors had imagined was there.”

Contact us to see what you can do to traverse these uncertain markets.

Sources:
Investopedia.com; HussmanFunds.com

Markets Keep Screaming North, Euphoria Sets In–Are You Protecting Your Retirement Income?

Am I being overly paranoid to worry about the stock market during a week when the Dow finally reached the 22,000 mark. Even the fact that the move was largely on the shoulders of Apple’s jump higher after it released great earnings news shouldn’t make much of a difference. The trend is the trend, and it is still to the upside. So, is there no end in sight? Euphoria, etc., we’ve seen this before. Make money on the up moves while you can, it’s fun! But don’t gamble with your Retirement Money by leaving everything “on the table.”

Red Flags
While the Dow and other major market indices soar, danger signs and red flags abound, as technical analyst Michael Kahn points out in his Barron’s column. August typically has relatively low trading volume, Kahn writes, and this means that a slight change in mood among a relatively small number of traders on the margin can produce big market swings. He notes that the flash crash of 2015, when the Dow shed 1,100 points in just 4 minutes, took place on August 24 of that year.

Worries about narrow market leadership by, and high valuations on, big tech stocks are one potential trigger for a correction that Kahn mentions. Others that he does not mention include: potential international crises involving North Korea and Russia; political controversies swirling around president Trump, such as the Russia investigations; Trump’s threats to launch trade wars; and the anemic U.S. economy.

Other predictions from five well-known market gurus, all trend bearish. Overvalued stocks were a chief concern of: Tom Forester, the founder of Forester Capital Management; Marc Faber, a consistently bearish newsletter author; and Rob Arnott, a pioneer of smart beta investing and the CEO of investment advisory firm Research Affiliates LLC. For his part, Forester added that the last two general market crashes were touched off by a collapse of investor confidence in a single sector. In the year 2000 it was tech stocks, and in 2008 it was financials. Faber also worried about narrow market leadership, with small numbers of stocks driving the major indexes upward.

Jim Rogers, who co-founded the Quantum Fund with George Soros, expressed concern over debt loads that are higher than prior to the financial crisis in 2008. Legendary bond fund manager Bill Gross, formerly of PIMCO and now with Janus Capital Group LLC, also worried about high indebtedness, weak productivity growth in the real economy, and an oversized financial economy. Earlier this year, Gross issued warnings similar to those made by Greenspan recently: that is, central banks’ massive infusions of liquidity since the financial crisis have created huge economic and financial distortions that will unwind with unpleasant market outcomes. (For more, see also: Bear Market Ahead: What 5 Big Investors Forecast.)

Bond Bubble?

For yet another source of worry, former Federal Reserve Chairman Alan Greenspan is warning of a bond market collapse that would bring down stocks. Greebspan says this is likely to happen after interest rates shoot up much faster than many people anticipate. (For more, see also: Stocks’ Big Threat Is a Bond Collapse: Greenspan.)

Unsustainable Interest Rates

“By any measure, real long-term interest rates are much too low and therefore unsustainable. When they move higher they are likely to move reasonably fast. We are experiencing a bubble, not in stock prices but in bond prices. This is not discounted in the marketplace,” Greenspan comments to Bloomberg.

When central banks start withdrawing liquidity from the financial system in earnest by selling their bond holdings, Greenspan believes that long term interest rates will spring sharply upwards. Thus, bond prices will collapse. Greenspan says that would lead to the worst bout of stagflation since the 1970s, a period when inflation accelerated amid a stagnating U.S. economy. This environment would spark a nosedive in stock prices, Greenspan continues, because sharply higher bond yields could spur a massive movement of investor capital from equities to fixed income instruments. (For more, see also: Bill Gross: QE is “Financial Methadone.”)

The Fed Model

The so-called Fed Model consulted by Greenspan, as explained by Bloomberg, compares the yields on 10-year U.S. Treasury Inflation Protected Securities (TIPS) to the earnings yield on the S&P 500 Index (SPX). The current figures are 0.47% and 4.7%, respectively, per Bloomberg, which notes that the gap between the two measures is 21% greater than its 20-year average. For those who subscribe to this analytical framework, high valuations for stocks are justified for now. However, another spin on this analysis, per Bloomberg, is that investors are justified in buying the less inflated asset. If bond prices rapidly deflate, as Greenspan foresees, stock prices will soon follow.

Your Money

My question to you is, “If market experts are worried about rapid reallocations occurring in the macro scale, why aren’t you concerned about the impact on your IRA/401k, and other retirement assets?” Contact me now to schedule a discussion and review options available for your family’s security.

Read more: Stocks’ Big Threat Is a Bond Collapse: Greenspan | Investopedia

Read more: What to Do When the Bubble Bursts: 3 Takes | Investopedia

Read more: Stocks Surge 20% Under Trump Amid Warning Signals | Investopedia

Cattle Livestock Futures Zoom While Summer BBQ Feasts Loom; Equities Flat Overall for the Week; Treasuries Await This Week’s News

Meat packers were scrambling to cover forward sold beef contracts last week as new weight for carcass weights continue to come in an average of 30# shy of last year’s weights. Chinese demand for beef is ever increasing as they’ve purchased technology for safe handling of beef from US leaders for years and are now ramping up to handle beef on their own at US tech levels. Add summertime on the horizon and BBQ pits everywhere cleaning up as the weather stays warmer and the demand has exceeded supply: cattle livestock futures soared. Read more here and here.

Sector performance in equities fell out pretty much like this: Information Tech up about 0.33%; Healthcare up about 0.24%; Energy up about 0.13%; Utilities Real Estate and Materials all down from 0.44%, 0.60% and 0.71%, respectively.  Also down 0.43% each were the Industrials and Consumer Discretionary Sectors. The Financials Sector pared 0.94%, while the Consumer Staples Sector stayed flat (0.00%).  Source.

In fixed income, US Govt 5 year yields are 1.81% on a 1.88% Coupon; 10 year 2.28% on a 2.25% Coupon; and 30 year 2.95% on a 3.00% Coupon.  Source. The Bonds markets are awaiting inflation news Monday May 1, 2017 while April payroll news is due at the end of the week, with the Fed to announce its policy on May 3. Plus, Congress still has to keep the government open next week by passing a stop-gap funding bill. Source.