Gadfly money manager John Hussman says leading indicators imply “the probability of oncoming recession near 100%” and warns investors against holding risky assets in what he foresees will be a “significant downturn.”
Hussman (left), a former international finance professor turned portfolio manager, writes in his latest newsletter to clients released Monday that “nearly every traditional asset class is priced to achieve miserably low long-term returns” right now. He adds the risk-reward dynamic could change quickly, presumably after a sharp drop in asset prices.
Looking at 20 recession flags–such as credit spreads lower than six months ago, the S&P 500 lower than six months ago, consumer confidence more than 20 points below its 12-month average–the Hussman Funds manager writes “the simple fact is that we’ve never seen a plurality (>50%) of these measures unfavorable except during or immediately prior to U.S. recessions.”
Hussman points to other economic indicators, such as German factory orders falling 4.3% while demand in other euro-area countries plunging 12.1% in the latest report. Eurozone manufacturing further weakened in October to a contractionary 47.1 PMI readings of less than 50 indicate negative growth. China PMI is still, barely, in positive territory at 50.4, but the latest reading was the lowest in three years.
Meanwhile, the menu of traditional asset classes is not particularly appealing now, according to Hussman’s model:
“The yield on 10-year Treasury notes is just 2%, 30-year yields are at 3%, the Dow Jones Corporate Bond Index is yielding just 3.5%, our estimate for 10-year nominal S&P 500 total returns is now at just 4.5%, and our 10-year total return estimate for higher-yielding utilities is still at just 5.5% annually (a figure that, while higher than our estimate for the S&P 500, is still among the lowest 15% of historical observations).”
Because valuations are rich and risks high, the Ph.D. portfolio manager warns against “trying to reduce risk when a hundred million other investors suddenly become interested in doing the same thing.” In other words, now might be a good time to sell, and investors committed to buy and hold should do so only after making “a conscious and deliberate” choice.
Hussman, a persistent critic of U.S. monetary policy, pins much of the blame on Federal Reserve Chairman Ben Bernanke for driving investors in to higher risk assets by keeping policy rates down. He also faults the Fed for what he describes as increasingly large government interventions that help “to dampen one crisis after another” but which have the effect of making these crises more frequent and not ameliorating the fundamental problems.
“The end result,” he writes, “is that investors face a perfect storm–risky assets priced to achieve dismal long-term returns (except in comparison to equally dismal alternatives), coupled with the risk of an oncoming global recession.”
Given the crisis-prone nature of this market, Hussman suggests hopefully that investment opportunities will arise–“probably not immediately but also not in the distant future.”