Tags: Hussman | Fed | FOMC | stocks

Hussman: Stock Market Rally ‘Will End Badly’

Friday, 12 Apr 2013 08:05 AM

By John Morgan

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Stock valuations are distorted largely because of wanton Federal Reserve policy, leaving corporate profit margins more than 70 percent above their historical norm, but there is zero chance the phenomenon can continue indefinitely, according to fund manager John Hussman.

In a weekly commentary for investors of his eponymous Hussman Funds, Hussman said the Fed’s quantitative easing (QE) policy merely has helped stall an inevitable downturn.

“While there is no shortage of smug observers who believe that recession risk does not exist and never did, the fact is that the strongest leading indicators, as well as the most timely coincident data, have deteriorated and danced along the border between economic expansion and economic recession for more than two years,” he wrote.

Editor's Note: Unthinkable Haunts Investors: Evidence for Imminent 90% Stock Market Drop.

Hussman pointed to recent “rapid-fire misses” in the purchasing managers index reports for both manufacturing and services and unexpected weakness of both payroll and household employment surveys.

“For my part, I continue to expect the U.S. economy to join a global recession that is already in progress in much of the developed world, assuming a U.S. recession has not already started, which we can’t rule out, but would require knowledge of eventual data revisions to confirm,” he noted.

“Suffice it to say that the realistic case for a sustained economic expansion here remains terribly thin.”

Hussman dismissed observers who point to results in the U.S. housing market as proof of an economic recovery.

He said the fact housing demand appears to be met from limited inventory plus new home building ignores the fact there is an “ocean of distressed and unsold homes already in existence.” That shadow inventory betrays a misallocation of capital and masks a market failure.

He saved his harshest judgment for what he regards as artificial valuations of stocks.

“On the earnings front, my concern continues to be that investors don’t seem to recognize that profit margins are more than 70 percent above their historical norms, nor the extent to which this surplus is the direct result of a historic (and unsustainable) deficit in the sum of government and household savings.

“As a result, investors seem oblivious to the likelihood of earnings disappointments not only in coming quarters, but in the next several years.”

Hussman expects a contraction in earnings over the next four years at a rate of approximatley 12 percent per year.

“Speculate if you believe that your exit strategy will dominate that of millions of other speculators, despite market conditions that are already overvalued, overbought, overbullish,” Hussman concluded.

“In my view, all of this will end badly.”

Meanwhile, Federal Open Market Committee (FOMC) members appear to be divided over how long to continue the current QE regime.

The minutes of the FOMC’s March 19-20 meeting showed one member wanted to slow bond purchases immediately, while the rest judged that “a highly accommodative stance of monetary policy was warranted in order to foster a stronger economic recovery in a context of price stability.”

In speeches this week, some Fed officials, including St. Louis Fed President James Bullard and Cleveland Fed President Sandra Pianalto, downplayed a discouraging March jobs report, saying it is premature to suggest the economy is entering a spring slump, MarketWatch reported.

Editor's Note: Unthinkable Haunts Investors: Evidence for Imminent 90% Stock Market Drop.

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