Hussman: When Speculators Prosper Through Ignorance

Dr. John Hussman wrote another great commentary this week on the topic of extreme valuations in the market currently. His article is linked here with some notable quotes extracted below:

Notable quotes from the article:

“…it’s precisely the untethered bullish enthusiasm of buyers, and the corresponding reluctance of sellers to part with their shares, that generates extreme overvaluation. Offensive valuation extremes could emerge no other way. Likewise, it’s precisely the wide-eyed fear of sellers, and the corresponding reluctance of buyers to absorb new shares, that generates extreme undervaluation.”

“…long-term total returns that investors actually achieve from their investments are tightly linked to the valuations that they pay”

“We continue to view recent market action as the likely final blowoff of one of the most extreme speculative episodes in U.S. history. The valuation measures we identify as most tightly correlated with actual subsequent S&P 500 total returns in market cycles across history range about 160% above (2.6 times) their historical norms, and more than 5 times the levels observed at points of secular undervaluation such as 1949 and 1982. This implies that a rather run-of-the-mill retreat to historical norms would now be associated with an expected market loss of about -60%, while a retreat even to a level still 25% above historical norms would be associated with a market loss exceeding -50%.”

“Investors should be particularly attentive to the fact that the median component of the S&P 500 is now far more overvalued than in 2000, 2007, or indeed in any prior point in history…”