While many bullish market watchers believe that stocks are now fully valued, the bears see bubbles.
John Hussman, head of Hussman Funds and one of the grizzliest bears in the U.S. landscape, makes the case against stocks remarkably clear.
“Make no mistake – this is an equity bubble, and a highly advanced one,” he said in his latest weekly market commentary.
“On the most historically reliable measures, it is easily beyond 1972 and 1987, beyond 1929 and 2007, and is now within about 15 per cent of the 2000 extreme.”
Mr. Hussman has gained some notoriety as an investor. Although he diligently sidestepped the 2008 financial crisis and bear market, he has argued since 2009 that stocks are expensive, missing out on gains of nearly 200 per cent for the S&P 500.
But as the S&P 500 moves deeper into record-high territory without a significant setback in about three years – and as investors ponder where stocks can possibly go after nearly five-and a-half years of gains – his concerns are growing increasingly difficult to push aside.
Mr. Hussman’s view that we are well within bubble territory rests on the idea that the Federal Reserve’s zero-interest-rate policy of recent years has driven up valuations, distorted our expectations for returns and inflated our tolerance for risk.
“In effect, zero interest rates have made investors willing to accept any risk, no matter how extreme, in order to avoid the discomfort of getting nothing in the moment,” he said.
He thinks nothing is a better option. According to his calculations, stocks look reasonably valued only if the Fed maintains its key interest rate at zero per cent until 2040 – or about a quarter century after economists expect the central bank to start raising rates.
And even if the Fed does hold rates near zero for another 25 years, he argues that long-term returns would still be well below their historical average.
In other words, investors are taking risks to get very modest rewards today, instead of being patient and winning larger rewards somewhere down the road.