John Hussman, Ph.D., the President of Hussman Investment Trust where he manages the Hussman Strategic Total Return Fund and the Hussman Strategic Growth Fund, describes the current market in the context of a bull market cycle in John Mauldin's Outside the Box on the Investors Insight web site. Excerpts below.
Link: InvestorsInsight : John Mauldin's Outside the Box
The current Market Climate in stocks is characterized by unfavorable valuations, but modestly favorable market action. Valuations are sufficiently high that we can already conclude that total returns on the S&P 500 over the coming 5-7 years will probably fall short of Treasury bill yields. The current bull market has already lasted beyond the historical norm, and though the S&P 500's percentage gains of the past several years haven't been spectacular from a historical perspective, this has been among the longest periods the market has ever gone without a 10% correction.
Temporary versus permanent returns
I've noted before that the "median" bull-bear market cycle is 4 years in duration (with a regularity that is typically attributed to the election cycle). Since there's some variation though, the average is closer to 5 years: about 3.75 years of advance, at roughly 28% annualized, and about 1.25 years of decline at roughly -28% annualized. While the individual variations are very wide, an "average" bull market return is 152%, followed by a decline of about -34%, for a total return of about 67% (roughly 10.7% annualized).
It's important to notice what this implies. An average bear market ultimately turns a 152% bull market total return into a 67% total return over the full cycle. That is, less than half of a bull market's trough-to-peak gains are typically preserved when you measure from trough-to-trough. It's hard to emphasize this enough.Consider even the unusually long advance from December 1994 through September 2000. During that period, the S&P 500 achieved a total return of 277%. During the ensuing bear market decline (to the October 2002 low), the market lost about 46%, resulting in an overall total return of 104% for the complete 8-year period. Even if you take the whole span from 1990-2000 as a single bull market, the ensuing 2-year bear reduced the total return from a 536% total return to a 245% full-cycle return.
In short, bear markets typically nullify over half of the preceding bull market advance. This is helpful to remember as investors rush to chase the speculative tail of an already aged and overvalued bull run.Market Climate
As of last week [Oct 13, 2006], the Market Climate for stocks was characterized by unfavorable valuations and modestly favorable market action. The implications of this for the long, intermediate and short-term are reviewed below.
On a long-term basis, we know that rich valuations are closely associated with disappointing long-term returns. Investors can certainly get good results focusing on long-term valuations alone, but as I noted earlier, that can also be very frustrating because it can invite extended periods when the "value-only" approach lags the market. For this reason, we do accept a "speculative" exposure to market fluctuations if our measures of market action are sufficiently favorable.
Indeed, on an intermediate term basis, the current overvaluation is mitigated somewhat by a modestly favorable tone to market action. That's sufficient to warrant a small call option position to "soften" our fully hedged stance. If the market can pull back moderately without losing its favorable internals, I would expect to increase that call position to 1-2% of net assets.
On a short-term basis, despite the modestly favorable tone of market action, the status of the market at the moment can be classified as "overvalued, overbought, and overbullish." The S&P 500 currently trades at 18.3 times record earnings (on record profit margins), stocks are clearly overbought on the basis of a variety of technical measures, and advisory bulls exceed 50%. Historically, this set of conditions has been associated with short-term market losses, on average, even when our broader measures of market action have been favorable.
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