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Portfolio > ETFs > Broad Market

The Bears Come Out

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After a roaring couple of months to start the year, the stock market appears to be slowing down somewhat. The S&P 500 was up more than 4 percent in each of January and February, but March’s numbers look like they’re flattening out a bit. As of the middle of this week, just a couple of days before the end of March, the S&P was up 2.3 percent on the month.

It’s possible we’re heading toward another dip, although it hasn’t quite happened yet. But some market watchers are starting to expect it. John P, Hussman, a Ph.D. economist who now runs the Hussman Funds, is perhaps the foremost of today’s bears. He thinks that the current market conditions are “among the lowest 1.5 percent of historical periods in terms of overall return/risk profile,” he wrote in a recent market commentary.

Hussman calls the current period “A Who’s Who of Awful Times to Invest.” He places it alongside 1973-74, 1987, 2000-2002 and 2007-2009 as among the worst conditions for investors that he’s ever seen. What makes this environment so bad? According to Hussman, it’s a lineup of “overbought conditions, overbullish sentiment, and a growing set of hostile syndromes.”

Here are some of Hussman’s negative indicators:

  • Insider corporate sales have been running at a pace of more than eight sales for every purchase. If you look simply at the dollar figures, the rate is even more widespread, running at around 13-to-1. Since corporate insiders generally receive stock options as part of their compensation, they sell more often than they buy stock, but the common ratio is more like 2 to 1, not 8 to 1.
  • The Standard & Poor’s 500 index is trading at more than 8 percent higher than its 52-week exponential moving average, and is now up more than 50 percent from its four-year low, back in March 2009. Both of those indicate that the market is overheated, Hussman feels.
  • The Shiller P/E, a rating developed by Yale economist Robert Shiller that looks at cyclically adjusted trailing 10-year earnings, is generally considered a negative indicator when it rises above 18. It’s now sitting at 22.
  • The 10-year Treasury yield is considered a negative when it’s higher than it was six months earlier. This one was sort of inevitable, since the 10-year Treasury spent much of last year at historic lows.
  • Hussman also watches investor sentiment to see if people are getting overconfident. His benchmark is if the Investors Intelligence survey shows bullish sentiment rising past 47 percent, and bearishness dipping under 25 percent. The most recent survey had bullish sentiment at 47.9 percent, although the bearish sentiment had not yet reached the critical stage, at 26.6 percent.

One interesting thing about Hussman’s indicators is that they’re all strictly focused on the markets and don’t deal at all with the larger economy, with the possible exception of the 10-year Treasury yield. Hussman tends to see the macroeconomic indicators following market sentiment, not the other way around. For example, the last two monthly unemployment reports have been strong at the federal level, with 243,000 jobs added to the economy in February and 227,000 jobs added in January. According to Hussman, the March report (due out on April 6) should show that the economy added only about 50,000 to 70,000 jobs in that month, due to general economic weakness. The April report will then have the economy losing jobs. So we’ll know fairly quickly if Hussman’s theories are coming true.

Hussman isn’t the only bear out there. Walter Zimmerman, head of technical analysis at the technical-advisory service United-ICAP, got some notoriety late last year for predicting that the market would nose upward early in 2012 before crashing down again. Zimmerman stands by that forecast, saying that investors who have been burned by sky-high markets will be reluctant to fuel the current market upswing with their dollars. Besides, he says, would-be investors have found their savings accounts running thin, leaving them with little money to plow back into the market even if they were so inclined.

Another bear is the well-regarded research firm ECRI, which recently put out a report indicating that it sees another recession looming. ECRI sees weak growth and slackening consumer spending as leading us back into another recessionary environment.

Of course, the market could slow — as we’ve seen a bit of so far in March — without going into another full-blown collapse. Hussman argues that the current market conditions are similar to those of 1973, when the market lost 48 percent of its value in 21 months, or in August 1987, when there was a drop of 34 percent in three months, or the conditions leading up the loss of 50 percent of the market’s value in 2000-02.

Yet long-term, he’s not so pessimistic. The official position of the Hussman Funds is that the S&P should present a 4.3 percent annual total return over the next decade. If even the most extreme bears are seeing returns for the next ten years being in solidly positive territory, maybe we’re not in for so much trouble after all.


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