Hussman: Under Extreme Secular Undervaluation S&P Hits 400

John Hussman
John Hussman, of Hussman Funds, had an interesting Weekly Market Comment out last week (there's a new one out tonight) that included a range of S&P targets based historical "prospective returns". He also thinks there's a possiblity that the S&P could revert back its secular valuation lows, with the potential of overshooting. He's not alone, Felix Zulauf sees the S&P reverting back to book value. In this case, Hussman values the S&P 500 between 600 and 1000 based on the historical prospective returns listed below; but under extreme secular undervaluation and/or macroeconomic conditions, he thinks the S&P could hit 400!

"Historically, the typical bull-bear market cycle has produced a range of 10-year prospective returns in a band between about 7.5% and 13%. That band presently corresponds to a range for the S&P 500 index between 600 and 1000. A 10% prospective return is right in the middle, at about 800 on the S&P. Once you recognize that profit margins are in fact cyclical, that range is about right, as uncomfortable as it may be to contemplate. Jeremy Grantham of GMO estimates that fair value is "no higher than 950." A tighter norm for prospective return between 9-11% maps to an S&P 500 between 750 and 850.

Finally, while I certainly would not expect it in the absence of extreme macroeconomic upheaval, major secular undervaluation as we observed in 1950, 1974 and 1982 would presently map to about 400 on the S&P 500. When you think of "once in a generation" valuations and "secular bear market lows" - that number, not anything near present levels, should be what crosses your mind. I am well aware that even discussing numbers like these, given the present mindset of investors, is likely to be dismissed as utterly ridiculous. Frankly, I would rather risk the ridicule of those who pay lip-service to research, cash flows, fundamentals, and value than to pretend these outcomes are impossible, when the historical record (and even the experience of the past decade) strongly indicates otherwise." (continue reading at HussmanFunds.com)

Comments

  1. FYI, check out the Hussman Strategic Growth Fund's 1, 5 and 10 year performance vs. the S&P and Russell 2000 http://www.hussman.net/pdf/hsgperf.pdf.  I was sent this on Google+.

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  2. The extreme lows contemplated with historical perspective are unrealistic. Without going into deep analysis, just reflect on what interest rates were in the 1982 example. WIth price being a reflection (at least in part) of interest rates, it is hard to contemplate such a low p/e with the inverse relationship that p/e's have with interest rates. Rates were in the high teens in 1982...now the 10 year is 2% or so.

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  3. Yes but in 1982 the US was not even close to 150 trillion dollars in debt (factoring in unfunded entitlement programs). In 1981 the US raised short term rates over 20%^ to head off inflation. Today we do not have the flexibiltiy to raise rates at all without going bankrupt. Its a strange new world out there.

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  4. And what do you think will happen when rates go back to 10%, is this scenario still unrealistic ? Not possible this time you say, look what is happening in Europe , besides Germany rates are minimum 4% with the PIGS between 6-10% not to mention Greece. So think again before declaring this time it's different. It's not

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  5. I entered data below comparing the secular lows of Shiller's P/E ratio and the 10 year Yield. The interesting part about today (or a few days ago) is the 10y broke BELOW the 1941 record low. Of course there are many other variables you can use. If you have other comparables I'd like to see them. You can also put the inflation rate next to this using this table http://www.multpl.com/inflation/. So what kind of environment are we going to see? A Japanese scenario, depression, extreme stagflation or.......?


    Sources: 

    Shiller P/E - http://www.multpl.com/table, 
    10y Yield - http://www.multpl.com/interest-rate/table
    Source of the source: http://www.econ.yale.edu/~shiller/data.htm

    YR     CA-P/E  10Y Yieldtoday  20.6x    2.05%1981   9.21x  12.57%1980   8.85x  10.80%1979   9.26x   9.10%1978   9.24x   7.96%1975   8.92x   7.50%1933   8.73x   3.31%1932   9.31x   3.68%1926 11.34x   3.68%1925   9.69x   3.86%1924   8.07x   4.06%1923   8.15x   4.36%1922   6.29x   4.30%1921   5.12x   5.09%1920   5.99x   4.97%1919   6.10x   4.50%1918   6.64x   4.57%1917  10.99x   4.32%

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  6. Everyone's perspective right now is to "lock in" perpetually high dividends. I need x% per year NO VOL! Seems to be a general scrip for any serious wealth right now. Why risk it...

    There is no flood of rising wages or productivity to slush into the US market. There is no cyclical growth in the US and it's an open question what the threshold is for gas prices. $4.00 is the new $3.00.

    The general mood seems to be to preserve position. Look at the Union strategy; all rearguard efforts.

    Plenty of people want to deny a trend. That's what makes the market.

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  7. Hi. If there is a crash, precipitated by the European crisis, our own deteriorating financial situation, and/or with a slowdown in China, it could well be equal to or worse than the last major bottom.  That much is certain.

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  8. The market over the years teaches you anything is possible , fear and debt creates humoungous volatility stay as close to price if you are a small trader and always hedge, Tecnicals on charts most always play out , for the last 9 months or so I thought the S&P was overpriced as it was constantly bought up by the Fed it had to break down with the endless Euro problems. The economy has been managed by greed and morons and here's the result , don't trust banks valuations and Gov.

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  9. Unless governments start balancing their budgets either:
    1.  Interest rates on new government debt instruments will have to rise as risk for default rises, or
    2.  Governments will have to "pay" for the deficits with more printing up of money out of thin air.

    But with governments unable to afford higher interest rates on their debt instruments (because of already high debt loads & low demand for new debt instruments forcing higher rates), they will be forced into option #2.

    But option #2 will, sooner or later, cause inflation, worsening the problem with option #1.

    The only option is to balance, or at least greatly reduce, the yearly government deficits that need new financing.  But for political reasons, cutting the budget won't be done.

    Therefore, either the paper currencies will eventually collapse or the governments will outright default (at least to some extent) on their debts.  Either way, we are headed, sooner or later, into a new & worse financial crises.

    At least that's how I see it.  But you never know with Central Bankers what schemes they might come up with.  They are extremely powerful.  However, eventually economic reality must set in.  I think the Central Bankers can only prolong the time for economic reality to hit.

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  10. At the end of the day all the economic analysis covers this simple truth with jargon; western Democracies have consolidated political power by gradually entitling great numbers to consume more than they produce.

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