Hussman: Sell Your Stocks Now!

“The median price/revenue multiple for S&P 500 constituents is now significantly higher than at the 2000 market peak,” Hussman writes.

Only by looking at market-cap weighted price/revenue multiples can one find two quarters where valuations were higher in 2000, but Hussman recalls that the market at that time favored megacap stocks, which skewed the “average” versus “median” yardstick. (Though even viewed in terms of a cap-weighted ratio, he says the historical norm is less than half current levels.)

The Hussman Funds manager focuses his analysis on price to revenue rather than price to earnings because of the unreliability of profit margin assumptions embedded in the former. But he argues that one has to view current record-high profit margins as permanent, “against all historical experience,” to see current valuations as anything other than historically extreme.

That means that anything short of a seven-year time horizon implies negative total returns; a 10-year time horizon carries an expectation of “weak total returns;” and Hussman warns passive buy-and-hold investors that a 50-year horizon is needed to justify such a strategy.

The academic-turned-manager known for his data-driven approach offers something of an apology, or encouragement to hang on, to Hussman fund investors who have missed the large gains in recent years during which his funds have followed a risk-off approach.

“Though we fully anticipated the 2008 credit crisis and had no qualms about valuation after the market plunged,” the imperative of “stress-testing against Depression-era outcomes … prevented us from accepting opportunities in the recent half-cycle.”

But that “miss,” he adds, “should not be a reason for investors to ignore the objective risks over the completion of this cycle – from what is now the richest broad market valuation that investors are likely to observe in their lifetimes.”

The doomsaying portfolio manager hits an upbeat note in anticipation of a time when his portfolio need not be defensively oriented, saying “we remain enormously optimistic about investment opportunities that are likely to emerge over the completion of the present market cycle and beyond.”