Market Direction and Stock Trends

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Eternal Sunshine of the Spotless Mind
By: John P. Hussman, Ph.D. | September, 2018

...So yes, historically the total return on stocks has exceeded the total return on bonds. But that has not been true starting from elevated valuations. Meanwhile, though many investors imagine that low bond yields somehow “justify” elevated equity valuations, this assumes that the trajectory of future cash flows is held constant. When interest rates are low because growth rates are low, stocks deserve no valuation premium at all, yet even “normal” valuations generate below-average stock market returns, via the lower growth rate. The chart below provides the most extended perspective on the matter that I can offer. Emphatically, I expect the S&P 500 to underperform even the depressed yield on Treasury bonds over the coming 12-year period.

...Again, given current valuation extremes in stocks, unfavorable market internals, and a relatively flat yield curve in bonds, I believe that lowly, humble cash has substantial option value, because it offers the opportunity to respond to potentially deep market losses. The strongest estimated market return/risk prospects emerge when a material retreat in valuations is joined by an early improvement in our measures of market action.

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