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Date Posted: 21:00:21 4/30/23 Sun
Author: Jasper
Subject: John Hussman

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Market conditions
At present, our most reliable equity market valuation measures remain more extreme than at any point in history prior to July 2020, with the exception of a few months directly surrounding the 1929 peak, and two weeks in April 1930. Meanwhile, our primary gauge of market internals remains unfavorable, based on uniformity and divergence of market action across thousands of individual stocks, industries, sectors, and security-types, including debt securities of varying creditworthiness. Those conditions may change, but for now we continue to estimate the likelihood of negative 10-12 year S&P 500 total returns, with the prospect of interim losses on the order of -60%. I recognize that these projections seem preposterous, but that is the situation that more than a decade of Fed-induced, yield-seeking speculation has now created for investors. For an extensive, data-rich discussion, see my February comment, Headed for the Tail.

Still, because financial markets are driven by the beliefs and opinions of market participants, it’s essential to concede that it doesn’t matter a bit – in the short term – whether those beliefs and opinions are correct. Actual economic relationships, cash flows, valuations, and reality only matter over the complete market cycle and over the long-term. It’s on that horizon – the completion of the cycle, and the long-term – that the difference between opinions and reality exert their impact, in the form of events like credit crises, market collapses, and extraordinarily long and interesting trips to nowhere for total returns.

As Benjamin Graham observed, in the short run, the market is a voting machine, but in the long-run, it’s a weighing machine. We remain convinced that attention to the combination of valuations and market internals is the most effective way to arbiter battles between short-term investor psychology and long-term cash flows.

While a shift back toward speculative investor psychology would not relieve the extremely poor long-term outlook for the equity market, it could certainly defer those consequences. My impression is that the window for such improvement is narrowing, given that measures of deteriorating employment conditions are gradually joining leading measures that have been pointing toward recession for months now. At current valuations, an improvement in our measures of market internals wouldn’t provide the basis for a bullish investment outlook, but it would suspend the immediacy of our bearish outlook. For now, conditions remain in what I often describe as a “trap door” situation. A market collapse, at its core, is really nothing but risk-aversion meeting a market that is not priced for risk.

https://www.hussmanfunds.com/comment/mc230424/

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