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.”

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Sources:
Investopedia.com; HussmanFunds.com

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.