John Hussman: Stock Bubble Goes 'Easily Beyond 1929 and 2007'

Tuesday, 29 Jul 2014 11:37 AM

By Dan Weil

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You might say that John Hussman, president of Hussman Investment Trust, is a bit bearish on stocks.

"Make no mistake: this is an equity bubble, and a highly advanced one," he writes in his weekly market commentary.

"On the most historically reliable measures, it is easily beyond 1972 and 1987, beyond 1929 and 2007, and is now within about 15 percent of the 2000 extreme."

Editor’s Note:
5 Shocking Reasons the Dow Will Hit 60,000


The crucial distinction between now and 2000 is that back then there was a clear bubble in the technology sector, while now the bubbles is spread across all sectors "in a way that makes valuations for most stocks actually worse than in 2000," Hussman warns.

The median price-revenue ratio of S&P 500 components already far exceeds the 2000 level, and the average across S&P 500 components almost matches that of 2000, he says. Meanwhile, record-high profit margins make price-earnings (P/E) ratios seem more benign than they are, Hussman writes.

The S&P 500 trailing P/E ratio stood at 19.5 Friday, up from 18.6 a year ago, according to Birinyi Associates.

The best thing for investors is "simply to maintain a defensive stance without fighting the market or taking investment positions that rely on immediacy of negative outcomes," he notes.

Some investors are even more bearish than Hussman is. Investors pulled money out of U.S. stock mutual funds in May and June, according to Morningstar.

"I think that [the stock fund outflow] has to do with the fact that the stock market appears to be fully valued," Michael Rawson, an exchange-traded fund analyst at the firm, explains.

"If we look at our [Morningstar's] price/fair value estimate, driven by our equity analysts, the stock market is at 103 percent of fair value, so the future returns are maybe still positive, but not as good as they would have been maybe a year or two ago."

Editor’s Note: 5 Shocking Reasons the Dow Will Hit 60,000

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