John Mauldin's column~Goldilocks?~906 days w/o a 10% correction

[mickeyd]

I found this an interesting article written by John Hussman. Here are a few snips from it. I realize that he is pushing his fund (HSGFX, mentioned below by name) so I would expect the article to tilt towards it's philosophy.

~~

In today's "Outside the Box," we will focus our attention on a well-thought piece by John Hussman, Ph.D. John is the President of Hussman Investment Trust where he manages the Hussman Strategic Total Return Fund - HSTRX and the Hussman Strategic Growth Fund - HSGFX.

In his Weekly Market Comment, John addresses the continued bull market run and compares it in duration to that of previous market cycles. We have currently gone 906 days without a 10% correction. John goes on to further explain the meaning behind this trend by discussing the level of P/E ratios and the climate for bond yields. One particular interesting part of his analysis is when he shows returns over a "full market cycle.
~~~
The key is that the market's ability to defy valuations is ultimately temporary. Over the long-term, investors can get perfectly good results by focusing only on valuations and ignoring the quality of market action altogether. Over the short-term, however, this can be very frustrating because the market can defy valuations for months or in some cases years before ultimately wiping out those "speculative" gains by returning to more normal valuations.
~~~~~

On a short-term basis, despite the modestly favorable tone of market action, the status of the market at the moment can be classified as "overvalued, overbought, and overbullish." The S&P 500 currently trades at 18.3 times record earnings (on record profit margins), stocks are clearly overbought on the basis of a variety of technical measures, and advisory bulls exceed 50%. Historically, this set of conditions has been associated with short-term market losses, on average, even when our broader measures of market action have been favorable.


http://www.investorsinsight.com/otb_...?EditionID=404

[justin]

This article makes me want to "do nothing" all over again.

[kcowan]

Mauldin has been promoting hedge funds as a safety net for the coming market swoon for 3 years now. Eventually he will be right...

[CybrMike]

Who the hell said the magic number had to be 10%

[bosco]

Mauldin keeps making bearish noises. Like most permabears, eventually he'll be right. He'll say "I told you so." Some money will be lost in the downturn. Probably not as much money as was lost by listening to him too much and staying on the sidelines waiting for the bear.

[Nords]

Originally Posted by bosco

Mauldin keeps making bearish noises. Like most permabears, eventually he'll be right. He'll say "I told you so."

No he won't. As usual he'll hire someone else to say it for him in "his" column while he snivels about how hard it is to write/market/sell his next book...

[haha]

To take a different POV, I find his free column very helpful. Far from being bearish, since he quotes at length from many different and clever writers, you get a broad range of ideas from his column-for example Louis Gave, the bond bull.

Hard to know what will happen, but two of the surest things judging by the history of markets are "what goes up, comes down, at least a good ways down"; and "excess will be corrected".

Note also that unconventional ideas are not always and necessarily wrong. Those of you who are pleased by equity performance in this decade are likely savers, because if you went into 2000 fully loaded you would have just got back to par- even taking the best performing large cap US average, the Dow. Add in a small return from dividends, you would be slightly ahead on nominal basis, but down real. If you were in the S&P or NASDAQ you would have done worse.

But some unconventional asset classes have done very much better- even some that were cheap, easy to buy and in fact bought by me in 2000 and 2001. Gold and gold stocks. At the year 2000 peak in the Dow the Dow/gold ration was approx 37. At the recent peak it had come down to 20. So gold has been twice as strong as the Dow.

This may be ready to reverse, or not. Interesting to remember that the ratio in 1980 approached unity, so the gold bulls still have some room to hope!

Ha

[. . . Yrs to Go]

Small-cap stocks corrected by about 14% from April to July of this year, but since July they have rallied to within 2.5% of their 52-week, and all-time, high. YTD the small-cap index is up about 12%. I sure am glad I didn't make major changes to my portfolio to protect against a 14% small-cap correction.

[haha]

Originally Posted by 3 Yrs to Go

Small-cap stocks corrected by about 14% from April to July of this year, but since July they have rallied to within 2.5% of their 52-week, and all-time, high. YTD the small-cap index is up about 12%. I sure am glad I didn't make major changes to my portfolio to protect against a 14% small-cap correction.

Think you might be indulging in a little ex- post reasoning?

Ha

[. . . Yrs to Go]

Originally Posted by HaHa

Think you might be indulging in a little ex- post reasoning?

Ha

Certainly, but such reasoning is basically the foundation for the buy and hold strategy. Historically, selling to avoid corrections has been a loser's game - I see no reason to think it will turn out differently going forward.

[kcowan]

The most similar previous dip was in 1966 and the correction was 25%. Calling for a 10% correction is pretty damped by average dips since then...

[. . . Yrs to Go]

As luck would have it, today (October 19th) is the 19th year anniversary of "Black Monday" when the Dow fell 22.6%. Immediately prior to the crash the Dow was at about 2,500, compared to about 12,000 today. Had you been unlucky enough to buy the Dow immediately prior to Black Monday and held on for the succeeding 19 years, you would have earned an annual return of about 8.6%

More ex-post reasoning, I know.

[wabmester]

Originally Posted by 3 Yrs to Go

Had you been unlucky enough to buy the Dow immediately prior to Black Monday and held on for the succeeding 19 years, you would have earned an annual return of about 8.6%

That seems low to me, given the raging bull market that followed. For comparison, if you had bought a treasury bond that day, your annual return over the next 19 years would have been closer to 10%.

[. . . Yrs to Go]

Originally Posted by wab

That seems low to me, given the raging bull market that followed. For comparison, if you had bought a treasury bond that day, your annual return over the next 19 years would have been closer to 10%.

My bad. No dividend reinvestment included in my back of the envelop Dow return calc.

Keep in mind, though, that those returns assume you bought the Dow just before the 2nd worst crash in its 110 year history. Even at that, with added dividends the returns would probably be closer to 11%.

[haha]

Originally Posted by 3 Yrs to Go

As luck would have it, today (October 19th) is the 19th year anniversary of "Black Monday" when the Dow fell 22.6%. Immediately prior to the crash the Dow was at about 2,500, compared to about 12,000 today. Had you been unlucky enough to buy the Dow immediately prior to Black Monday and held on for the succeeding 19 years, you would have earned an annual return of about 8.6%

More ex-post reasoning, I know.

Hey Tiger, have at it. It might be the very best plan in your situation, whatever that may be.

Ha

Originally Posted by wab

That seems low to me, given the raging bull market that followed. For comparison, if you had bought a treasury bond that day, your annual return over the next 19 years would have been closer to 10%.

Yup! - Seems way to low to me also. Since Stocks have averaged about 10% over the last 80 years or so, I was thinking it might be as high as 15% with the raging bull market of the 90's.