First graph I have seen in a long time that makes me want to sell stocks

[Running_Man]

Here is the column that explains how he calculates the horizontal axis
https://www.hussmanfunds.com/wmc/wmc150518.htm

Hussman has been very negative for a couple of years and in general has been more negative on the market than most anyone I know but it is a very interesting chart I feel

[NW-Bound]

Is this not the Web page where the plot is explained? It is dated Feb 13, 2017.

https://www.hussmanfunds.com/wmc/wmc170213.htm

[Running_Man]

Quote:

Originally Posted by NW-Bound Is this not the Web page where the plot is explained? It is dated Feb 13, 2017. https://www.hussmanfunds.com/wmc/wmc170213.htm

Perhaps it is the whole of the article but he listed the 5/18/15 on the chart itself as to the explanation of the calculation including foreign revenues for the horizontal axis so that is why I included the one he was actually referencing in the post with the image

[NW-Bound]

About the chart, I do not know the significance of the measure of Market Cap/GVA, but Hussman made the point that the most gain we can expect in the next 4 years is maybe 12%, but the worst case loss may be 40%.

What he's saying is that potential reward looks much smaller than potential loss.

Note how, even if Market Cap/GVA is reduced to 1/2 of the current value, the worst case loss looking 4 years ahead is still high at 50%, However, the potential maximum gain would be as high as 200%, making it a better bet to be invested at lower valuations.

It's very interesting that the worst case loss hovers around 50% for a wide range of valuation, but the best case gain goes up dramatically at lower valuations.

[Dawg52]

Welp.......looks like that big correction is coming. Of course I thought that some 2k dow points ago. Next time somebody please give me the exact date so I can plan accordingly.

[athena53]

Wow- that beautiful chart makes the numbers geek in me quiver with excitement!

I had a Hussman fund for awhile- Hussman Strategic Growth (HSGFX). That was maybe 15 years ago. It did well for awhile but then fizzled and I sold it. Average annual return over the last 10 years is -5.25%. No positive average annual returns over 3, 5 or 1 year, either. Glad I sold it.

[braumeister]

Quote:

Originally Posted by Running_Man Hussman has been very negative for a couple of years and in general has been more negative on the market than most anyone I know but it is a very interesting chart I feel

Hussman is well known as a permabear, and I pay no attention to him. Someday he'll be right, but he has predicted doom and gloom for so long that he'll have to be right eventually.

[NW-Bound]

That's what I am afraid of. That is it's about time he is right.

I only know of Hussman from earlier mentions on this forum. I saw the performance of one of his funds. It sailed right through the 2008-2009 Great Recession and went up slightly, but trailed the S&P in the last few years. Maybe he gets to say again "I told ya!".

[samclem]

It's time for S&P to come out with a new index, the "S&P 501E." It'll be composed of the 501 largest public US corps with an even number of letters in their name. Mutual funds will flock to index it because they can claim the gloomy look ahead for that old S&P 500 index doesn't apply to this entirely new index. It'll be like "New Coke."

[Running_Man]

Quote:

Originally Posted by braumeister Hussman is well known as a permabear, and I pay no attention to him. Someday he'll be right, but he has predicted doom and gloom for so long that he'll have to be right eventually.

I agree that he has been very bearish for very long, I still find the chart fascinating as a measure of market valuation, not the only measure but a measure of market valuation.

I have seen company after company of major companies with declining sales and rising stock prices that make me wonder what the driving force is other than continued index investing. For example Johnson and Johnson, Apple Computer, United Technology, IBM, Coca Cola, Procter and Gamble, Walmart, McDonalds to name a few. It is merely a mark of where we are presently and how it compares to the past, not much different than Fire Calc and with the same error probabilities.

[6miths]

So the S&P 500 has given me a 250% return since March 2009. I should be really upset if it takes 20% back? And if it takes back 50 or 60% barring the end of the world, is there going to be a better game in town? Rebalance every 1-2 years and get on with life.

[JohnnyBGoode]

Quote:

Originally Posted by 6miths So the S&P 500 has given me a 250% return since March 2009. I should be really upset if it takes 20% back? And if it takes back 50 or 60% barring the end of the world, is there going to be a better game in town? Rebalance every 1-2 years and get on with life.

+1

Yes, surely a correction will come, but think of all the gains missed out because he was on the sidelines waiting for the correction. Just proves the point - think long term and hold on. You don't have to look too far back to recall the doom & gloom about Brexit and the election.

[NW-Bound]

I don't see anything on the horizon to make the S&P drop 50% (but then I could not foretell the drops in 2000-2003 and 2007-2009 either).

But if it does, then it would leave me with, relative to March 2009, 250% x 50% = 125%. After inflation, that does not leave me with much gain if any. I would not be happy at all.

So, that's the reason for me to drop my stock AA from 80% to 60% late last year. Yep, I've got cash to buy if the market tanks. Bring it on!

Still get a return of 4% YTD while holding that much cash. My long-suffering sectors are now coming alive. Halleluyah! Wonder how long it is going to last.

[6miths]

That's fine if you have decided that you are more risk averse or have just won the game but if one is trying to time the market then over the long haul, on average it's ultimately going to leave one with less money. If one doesn't have a big cushion then it may be wise to be more risk averse. 60:40 isn't that conservative at the end of the day.

And of course I cherry picked March 2009 but if it drops 50% in the next 6 months, what is it likely to do in the 3 years after that. I long ago decided that I just wasn't smart enough to figure out where things are going. Some one told me to pick an AA, keep costs low, rebalance, stay the course. Seemed like good advice, I try to follow it.

[pb4uski]

Quote:

Originally Posted by braumeister Hussman is well known as a permabear, and I pay no attention to him. Someday he'll be right.....

Even a blind squirrel finds a nut every once in a while.

[HadEnuff]

Quote:

Originally Posted by Dawg52 Welp.......looks like that big correction is coming. Of course I thought that some 2k dow points ago. Next time somebody please give me the exact date so I can plan accordingly.

I was pretty sure when we hit 17K we were gonna crash.

And I'm still quite certain we will. Eventually.

Fortunately, I guess, although I was certain we would crash, I did not change my AA.

I probably should.

[NW-Bound]

Here's something to counter Hussman's bearish arguments. I just read Liz Ann Sonders' article showing that the S&P 500's earnings look to pick up soon. It is headed towards 10% year-over-year growth after 6 stagnant quarters, starting in Q1 of 2015. Liz is Chief Investment Strategist of Schwab, a position she has held for a long time.

So, if the P/E ratio does not contract, E grows 10% so P also grows 10% and it's fair. Oui?

By the way, I also happened to see a video played by Yahoo Finance and Liz was in this presentation. She has not aged much at all, ever since I saw her on Louis Rukeyser's show back in the late 90s. Darn, that's 20 years!

[Dawg52]

Quote:

Originally Posted by NW-Bound By the way, I also happened to see a video played by Yahoo Finance and Liz was in this presentation. She has not aged much at all, ever since I saw her on Louis Rukeyser's show back in the late 90s. Darn, that's 20 years!

I've noticed that too. She hasn't aged much at all. Now what were we talking about?

[athena53]

Quote:

Originally Posted by 6miths So the S&P 500 has given me a 250% return since March 2009. I should be really upset if it takes 20% back? And if it takes back 50 or 60% barring the end of the world, is there going to be a better game in town? Rebalance every 1-2 years and get on with life.

During the last crash, nearly $500K of investment gains evaporated from our portfolio. Those years were a bit different because I was still putting new money in, and because DH was alive. Bless him, he knew little about investing but he always knew how to put things into perspective. He told me they'd been paper gains, anyway. I held on and recovered (and then some, of course) and hope to do the same thing if (when) we have another crash.

Haven't seen Liz Ann Sonders in ages but I agree with the observations- I know I've got brains and believe me, I appreciate them, but when I see someone that brainy AND that attractive I joke that there's no justice in this world.

[Totoro]

I like the depth of Hussman, learned a few things from his analysis. The big underlying problem (that he is aware of!) is trying to use statistics on the past to manage the future.

My own crash indicator is a fairly simple one: Equities are not worthwhile compared to bonds if in real terms the yield (CAPE) hits or drops below zero.

So if you have a CAPE of 25 = 4% and 4% inflation, trouble tends to happen very quickly and there is no harm being cautious. If the indicator goes positive again a few months in a row, get back in.

This happened only nine times since 1929, specifically:

• Late 2007 to late 2008: From 1500 to 900 (-40%)
• Late 2005 to late 2006 : From 1200 to 1300 (+8%)
• Mid 1999 late 2001: From 1300 to 1200 (-8%)
• Mid 1979 to early 1981: From 102 to 134 (+32%)
• Mid 1973 to late 1975: From 105 to 85 (-19%)
• Late 1968 to mid 1970: From 100 to 75 (-25%)
• Early 1951 to mid 1951: From 22 to 23 (+5%)
• Mid 1946 to late 1948: From 19 to 16 (-16%)
• Late 1941 to late 1942: from 10 to 9 (-10%)

That's the full list, no cheating



Three 'misfires' are in there, how bad are they?

• 2005: bonds were yielding 5%, so that's ok. Including dividends (2%) you missed out on 8%-5%+2% = a 5% run-up
• 1979: bonds at ~10%, so you got 15% from there. So you missed out on 32% - 15% + 5% div. = +22%. Ouch.
• 1951: bonds at 2.5%. Missed: 5% - 2.5% + 7% = +9.5%. Also ouch.

... and which big crashes did it miss (drops of more than 10% yoy)?

• Mid 1987 to early 1988: 330 to 270 (-20%)
• Early 1977 to early 1978: 104 to 90 (-14%)
• Late 1961 to late 1962: 72 to 60 (-17%)
• Early 1937 to mid 1938: 18 to 10 (-45%)
• ... and 1929 ...

So what, you say? Well, doing this consistently gets you fewer downdrafts with structural outperformance of ~3% per annum.


Will this work in the future? I don't know. What I do know is that right now the CAPE is approaching 30 and inflation is climbing above 2%. So I'm watching inflation numbers pretty closely.


[Note: numbers rounded, so don't shoot the pianist]