Last week, we noted how The Wall Street Journal’s Jason Zweig says that we’re in the best time ever for individual investors, thanks largely to the way fees have declined and the ease of obtaining information has increased over the years. This week, however, John Hussman argues that, in terms of the specifics of the current market conditions, it’s one of the worst times ever to invest.
“This is not a runaway bull market,” Hussman, whose funds have solid long-term track records but have stumbled in recent years, writes in his latest market commentary. “Rather, it is a market that again stands near the highs of an extended but volatile trading range. I am convinced that the breakdown of the market from this range has been deferred only through repeated and extraordinary central bank actions.”
Hussman says the current market is characterized “by an extreme set of conditions that we’ve previously associated with a ‘Who’s Who of Awful Times to Invest,'” citing the 1972-73 and 1987 market peaks and several occasions since 1998. Hussman says that when similar conditions have occurred in the past, they’ve been followed soon after by moderate and/or severe declines. In the past couple years, however, that trend has stopped, and he says it’s largely because of central bank efforts to bolster markets.
Hussman says it is critical for investors to remain defensive, despite the rising market. “It’s easy to underestimate how utterly excruciating it is to remain hedged during these periods when you actually have to live through day-after-day of advances and small incremental new highs that are repeatedly greeted with enthusiastic headlines and arguments that ‘this time it’s different,'” he says, adding, “The completion of the present bull-bear market cycle (and it will be completed) will undoubtedly present strong opportunities to play offense, but today stands among a Who’s Who of the worst historical times to do so. Particularly for investors who do not have a large number of future cycles between now and the point they will need to draw significantly on their assets, a defensive stance is crucial here.” He adds, however, that “our present defensiveness is unlikely to persist a great while longer.”
A couple reasons for Hussman’s bearishness: He says that arguments about stocks being cheap based on forward earnings fail to take into account unsustainably high levels of profit margins, and that they compare those P/Es to “bubble-era norms”. He also looks at a variety of economic indicators that he says are pointing toward trouble.