Investors are excited that the cuts can ensure a soft landing for the U.S. economy and keep both the labor market and consumer spending strong enough to help the bull market's expansion continue.
But Juan HusmanThe president of the Hussman Investment Trust who called the market crises of 2000 and 2008, is skeptical that a Fed turnaround could provide the kind of boost to stocks that investors hope for.
Two things stand in the way of continued outperformance for the S&P 500: Stock valuations are near their highest levels in history, and investor sentiment isn't actually as strong as it needs to be to continue rising shares.
When it comes to determining market valuation, Hussman prefers his measure of market capitalization to gross value added for non-financial stocks, which he says more accurately forecast long-term market returns. Hussman's move has been cited by a fellow bear and investing legend. Jeremy Grantham in recent interviews.
In the chart below, it is evident that current levels of market capitalization relative to gross value added are above those seen in both 1929 and 2000, when stocks were on the verge of two of the biggest declines in history. market history.
Hussman Funds
Other common valuation measures, including Shiller Cyclically Adjusted Price-to-Earnings Ratio (CAPE)show stocks are historically high
FocusGuru
When it comes to investor sentiment, which he refers to as "market insider information," Hussman also uses his own measure. Basically, he looks at how wide the participation in a market rally is among individual stocks, also known as market breadth. Hussman says this offers a window into the degree to which investors are inclined to speculate.
The following graph, from a November note, shows the measurement represented by the red line. When it is flat, internal factors are unfavorable and stocks tend to underperform. This is easy to see in the crises of 2000 and 2008.
Hussman Funds
Hussman says investors often associate the Fed's gyrations with years in which the Fed cut rates while valuations and domestic factors were favorable. But when the Federal Reserve pivots when these elements are not in a good situation, Hussman believes it does nothing to boost stocks.
"The longing for affection that investors feel for the Fed's pivots is quietly driven by the fact that almost all of the pivots occurred when the S&P 500 was already at historically normal or depressed valuation levels," Hussman said.
He continued: "In contrast, the horrible market results that followed the 1973, 2007 and 2001 swings were associated with the combination of elevated or extreme valuations without sustained improvement in internal factors. The 'middle' case was 2019, when the market responded well despite elevated valuations, because internal market factors had improved considerably."
With high valuations and poor investor sentiment, stocks will suffer negative returns over the next 12 years, Hussman said. In fact, given the current state of valuations, and especially considering how high risk-free Treasury yields are right now, history shows stocks could fall dramatically, he said.
"Currently, we estimate that a drop to the 1650 level in the S&P 500 (a 65% loss) would be necessary to restore the S&P 500's historically expected returns of 10% annually," Hussman said. "A level of 1800 (a 62% loss) would bring our estimates of expected returns to a typical risk premium of 5% above current 10-year Treasury yields. A drop to about 2750 in the S&P 500 (a loss of 42% ) would bring our 10-year S&P 500 total return estimates simply in line with the prevailing 4% yield on 10-year Treasuries."
He added: "None of these figures are forecasts, but they do represent historically consistent estimates of the potential market losses that would be necessary to restore expected long-term performance levels for pedestrians. I realize that estimating potential market losses of 42-65% may seem absurd, but as I wrote in March 2000, 'If you understand values โโand market history, you will know we are not joking.'"
Hussman's background and opinions in context
Perhaps a contradiction in Hussman's argument lies in his assessment of investor sentiment.
Their measure of โmarket insidersโ says investors are unwilling to take risks. However, Hussman also notes that investors are eager to get out of the bank as the Federal Reserve prepares to pivot.
"The rally we've seen, particularly in recent weeks, reflects a near-frenzied expression of pent-up 'fear' of a Fed turn that investors hope will extend the bubble," Hussman said.
Other measures of market breadth also show improvements, while Hussman's remain "unfavorable."
"Over the past month, we have experienced arguably the best stretch of breadth improvement in 2023. The equal-weighted S&P 500 has outperformed the cap-weighted S&P 500 by 4% since mid-November," said Mike Wilson, head of U.S. equities strategist at Morgan Stanley, in a Dec. 18 note. "Furthermore, the percentage of S&P 500 members above its 200-day moving average reached 78% last week, matching the highest level this year. This is an encouraging sign. It will be important to see this dynamic continue over time. as we move beyond the end of the year and into 2024."
Still, Hussman's measure has been an impressive performer in the past, and the stock is largely flat since the market peak when his measure turned negative.
Ultimately, the strength of the US economy in the coming months will greatly influence the performance of stocks in the near term. For now, a soft landing appears to be in sight, with the unemployment rate at 3.7% and inflation at 3.1%. Of course, that could change in the future.
For the uninitiated, Hussman has repeatedly made headlines by predicting a stock market crash surpassing 60% and predicting a full decade of negative stock returns. And while the stock market continued to rise, he has persisted in his apocalyptic calls.
But before you write off Hussman as a permanent bumbling bear, consider his record again. These are the arguments he has put forward:
-
In March 2000 he predicted that technology stocks would plunge 83%, then the tech-heavy Nasdaq 100 index lost an "improbably accurate" 83% over the period from 2000 to 2002.
-
In 2000 he predicted that the S&P 500 would likely earn negative total returns over the next decade, and it did.
-
In April 2007 he predicted that the S&P 500 could lose 40%, and then lost 55% in the subsequent crash from 2007 to 2009.
However, Hussman's recent returns have been less than stellar. His Strategic Growth Fund is down about 46.8% since December 2010, and has fallen about 12.6% over the past 12 months. In comparison, the S&P 500 is up about 24.6% over the past year.
The amount of bearish evidence Hussman is uncovering continues to grow, and his calls over the past few years for a substantial sell-off have started to prove accurate in 2022. Yes, there may still be returns to be had in this new bull market. , but at what point does the increasing risk of a major accident become too much to bear?
That's a question investors will have to answer for themselves, and one Hussman will continue to explore in the meantime.
