Worries about the Federal Reserve retreating from monetary stimulus make little sense as a cause of the market’s recent slide, suggesting other factors are at play, according to John Hussman in his current comment to Hussman Funds shareholders.
Rather, the portfolio manager and former finance manager suggests that sentiment has shifted from risk seeking to risk aversion and reiterates his long-held view that current market conditions match those that have preceded panics and crashes of the past.
Hussman (left) ridicules the view that a hawkish Fed is the cause of the market’s doldrums, saying the Fed actually confirmed its dovishness and that investors “just got a handwritten, perfumed note from Bernanke to keeping buying.”
All the Fed chairman actually said was that, despite a balance sheet that is leveraged nearly 60 to 1 against its capital, “the Fed might possibly reduce the rate at which it expands that position…There was no talk of risks. Not a whisper about diminishing benefits….While QEternity will become QEventualTaper, the Bernanke Fed does not actually contemplate stopping until the unemployment rate comes down.”
Consequently, Hussman argues that other factors—such as credit strains in China or expectations of disappointing earnings—may be spooking investors. “But whatever the reason, investors appear to be shifting from risk seeking to risk aversion,” he says.
And that new mood is consonant with Hussman’s longstanding warning that market history is not on the side of stock market buyers today.
Besides today, Hussman sees just four other times—1929, 1987, 2000 and 2007, none joyous for investors—marked by a combination of deterioration in interest-rate securities, “overvalued, overbought, overbullish conditions” and a broad deterioration in market internals.
Indeed, the former finance professor and fund manager’s reputation got a boost from just such a warning in his July 30, 2007, market comment.
“To believe that the present instance is a good time to accept significant market risk, one has to rely on the premise that this time is different,” Hussman says in his current note, adding that valuations today are “near or above every historic bull market peak except 1929, 2000 and 2007.”
A difference between those crashes and today, however, is that the Fed was tightening whereas today it merely hints of tapering.
Hussman is unimpressed with this distinction:
“The Fed is unlikely to raise its policy rates (Fed funds, discount rate) for years, but it seems unlikely that this will be sufficient to forestall the course of normal bull-bear market cycles. Ask Japan.”
Despite the vulnerability he sees for stocks, the portfolio manager actually put in a good word for bonds, saying their recent sell-off may make them a reasonable investment, “particularly if yields rise further.”
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