Fed Chair Janet Yellen says stock market valuations are within historical norms, but money manager John Hussman says she’s dead wrong. By his reckoning, investors are making the most leveraged bet on overvalued stocks in American history.
According to Hussman, founder of the
Hussman Funds mutual fund family, those who call themselves long-term investors and their passive stock strategies often do not survive bear markets.
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“We’ve recently emphasized that our estimates for probable S&P 500 nominal total returns have now declined below zero on every horizon of seven years and shorter,” he wrote in his weekly market commentary. “The greatest discomfort for us is that in speculative, overvalued, overbought, over-bullish markets, we’ll often look like idiots, lose credibility, and later recover a flood of followers who were bloodied in a completely predictable collapse that makes us look like evil geniuses.”
Hussman said one reason for his conviction stocks may soon plummet is that profit margins are already stretched to the maximum.
According to his research, investors are “pricing stocks on the assumption that current record profits can be used as a ‘sufficient statistic’ for cash flows that will emerge decades and decades from today. That’s exactly what it means to value stocks as a multiple of, say, forward operating earnings.”
He believes current stock valuations, and profit margins themselves, have been badly warped by huge Federal Reserve monetary stimulus and unprecedented asset purchases of recent years.
“The danger, after more than a decade of repeated Fed-induced bubbles, is that we allow ourselves to believe that valuation ‘norms’ have drifted higher, without recognizing that these richer valuations are still associated with dismal long-term returns.”
Hussman said Fed-induced speculative valuations are now visible across the board, as the median price/revenue multiple on S&P 500 components, and on the broader S&P 1500 components, is at an all-time high, easily exceeding the 2000 peak around the dot-com bubble.
USA Today reported that in recent remarks from Yellen, she acknowledged there may be a bit of froth in small-cap stock valuations, even as she maintained there is no broad market bubble.
The Russell 2000 Index, which focuses on small stocks, is down the most among major indexes in 2014, the newspaper reported, and was approaching 10 percent correction territory this week.
The Wall Street Journal reported investors have been fleeing overvalued momentum stocks recently, and are streaming into traditional dividend stocks, a trend it concluded may continue as investors seek safety.
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