Bubbles are generated when investors drive valuations higher without simultaneously adjusting expectations for future returns lower. In other words, the defining feature of a bubble is inconsistency between expected returns based on price behavior and expected returns based on valuations. The “Bubble Term” measures the gap between the two. Unless the Bubble Term is able to become exponentially larger forever – it shows up as a growing gap between the long-term return that investors expe...| Hussman Funds
Speculative psychology is the only thing standing between an hypervalued market that continues to advance and a hypervalued market that drops like a rock. Our best gauge of that psychology - the uniformity of market internals - remains divergent enough to keep market conditions in a trap-door situation.| Hussman Funds
The recent 'everything bubble' has taken its dear sweet time to collapse. Even though the S&P 500 remains down from its early 2022 peak, and 30-year Treasury bonds have lost over half their value since early 2020, the market has maintained the appearance of 'resilience.' Yet there need not be a proportional relationship between the size of the last grain of sand, the length of the last straw, or the weight of the landing butterfly, and the extent of the catastrophe they provoke.| Hussman Funds
The greater the misalignment between financial quantities and economic quantities, the more distorted and grotesque the whole picture becomes, particularly if nobody carefully connects the dots. Unfortunately, investors and policy makers repeatedly insist on learning that the hard way.| Hussman Funds
One of the striking things about bull markets is that they often end in confident exuberance, while simultaneously deteriorating from the inside. Internal divergences, the lowest prospective market returns in U.S. history, and why not-QE really is not QE.| Hussman Funds
With our most reliable stock market valuation measures at the highest extremes in U.S. history, record negative readings on our most reliable 'equity risk premium' gauge (estimated S&P 500 total returns vs. Treasury yields), and the narrowest junk bond risk premiums in history, it’s useful for investors to remember that a market crash is nothing but risk-aversion meeting a market that is not priced to tolerate risk. Emphatically, nothing in our investment discipline relies on a market colla...| Hussman Funds
If you look deeply into a speculative bubble, you can see the market collapse in it. If you look deeply into a market collapse, you can see the bull market in it. Each is a continuation of the other.| Hussman Funds
At its core, a market crash is nothing but risk-aversion meeting a market that's not priced to tolerate risk. We always become concerned about “trap door” outcomes when rich valuations are joined by deterioration in the uniformity of market internals - which is our most reliable gauge of speculation versus risk-aversion among investors. Our concerns about trap door conditions become even more pointed when investor confidence has been destabilized. We are presently on high alert for a poss...| Hussman Funds
In recent years, our most reliable measures of stock market valuation have pushed beyond their 1929 and 2000 peaks, and I’ve described the period since early 2022 as the extended peak of the third great speculative bubble in U.S. history. In my view, that process is now complete. The stock market faces severe downside risk ahead, and the U.S. is constrained in the unsystematic monetary and fiscal expansion that both amplified that bubble and fueled record but wholly impermanent corporate pr...| Hussman Funds
Navigating challenging market conditions requires an understanding of how different asset classes, investment styles, and sectors perform during periods of heightened volatility. While traditional defensive assets like Treasuries have provided protection in some downturns, their effectiveness has been inconsistent. Hedged-equity strategies that hold stable, reasonably-valued, high-quality stocks — particularly weighted toward defensive sectors like Consumer Staples and Healthcare, can be pa...| Hussman Funds
With regard to the record ratio of financial market capitalization to GDP, the government deficits of the past eight years have bloated the corporate profits on which investors are placing extreme price/earnings multiples while calling it 'stock market capitalization.' Meanwhile, the highest income earners have also accumulated the cash and securities that the government issued to finance the deficits. As a result, the massive deficits of recent years are a significant portion of what the dee...| Hussman Funds
While investment universes of the equity focused and asset allocation funds differ, they share similar features of the investment process:| Hussman Funds
The strong performance of large-cap stocks over the past decade has left the market exceptionally top-heavy. By some measures, stock market capitalization has never been more concentrated among a handful of large stocks as today. Following periods of high market concentration, stock market returns are not only low over the subsequent decade, on average, they also tend to be highly volatile. Taken together, these characteristics – losses for Mega-Cap stocks, strong relative returns but low a...| Hussman Funds
It’s enormously tempting to imagine, at bubble highs, that glorious backward-looking returns, far greater than those previously implied by valuations, demonstrate that historical standards of value are outdated and obsolete. In 1934, Benjamin Graham and David Dodd described the mood surrounding the 1929 market peak, observing that investors had abandoned their attention to valuations because 'the records of the past were proving an undependable guide to investment.' For the moment, neither ...| Hussman Funds
On Friday December 6th, the U.S. stock market pushed to the most extreme level of valuation in U.S. history, based on the measures that we find best-correlated with subsequent S&P 500 total returns, as well as the depth of subsequent losses over the completion of market cycles across a century of data. That’s not a forecast. Rather, it’s a statement about current, measurable, observable market conditions.| Hussman Funds
Change is the sum of fundamental trends, the gradual elimination of accumulated extremes, and the random arrival of new shocks. This is true for nearly every process, including economic growth and stock market returns.| Hussman Funds
One of most dangerous habits of a speculative crowd is the tendency to use unconditional averages and unconditional probabilities regardless of how extreme market conditions have become. This is like stepping into a house with two rooms, one with the temperature at 0 degrees and one at 140 degrees, and expecting a temperature of 70 either way.| Hussman Funds
Ockham’s razor is a principle that states that among various hypotheses that might be used to explain a set of observations, the hypothesis – consistent with the evidence – that relies on the smallest number of assumptions is generally preferred. Essentially, the razor shaves away what is unnecessary and retains the most compact explanation that is consistent with the data. The same basic principle runs through the history of thought from Ptolemy (“We consider it a good principl...| www.hussmanfunds.com
Despite the year-to-date decline in the S&P 500, the most reliable valuation measures we monitor remain at levels never observed in market history prior to August 2020. Meanwhile, market internals remain ragged and divergent, suggesting risk-aversion among investors. That combination creates what I've often described as a "trap door" situation. You make friends with bears by understanding them, and by avoiding behavior that will get you eaten.| Hussman Funds
When people say that extreme stock market valuations are “justified” by interest rates, what they’re actually saying is that it’s “reasonable” for investors to price the stock market for long-term returns of nearly zero, because bonds are also priced for long-term returns of nearly zero. I know that’s not what you hear, but it’s precisely what’s being said.| Hussman Funds
Archived commentary is historical in nature and should not be assumed to reflect the current investment outlook or investment practices of the Hussman Funds.| Hussman Funds
It's the wrong question to ask, "How can we somehow force internals to look like trend-following measures that aren't as reliable across history?" Happily, abandoning that question frees us to ask a better question. Once one accepts that internals are, in fact, behaving as intended, the question becomes: "How can we benefit during bearish conditions when valuations and internals validly hold us to a defensive outlook, yet obvious but less reliable trend-following measures remain favorable?" A...| Hussman Funds
The key takeaway is that attending directly to market internals is actually more effective than attending to monetary easing or tightening. Still, given that we can expect a pivot toward lower rates in the near future, how much do valuations tend to increase, on average, in the 3, 6, 12, and 24 months following a Fed pivot? The answer is simple. They don’t.| Hussman Funds
By relentlessly depriving investors of risk-free return, the Federal Reserve has spawned an all-asset speculative bubble that we estimate will provide investors little but return-free risk.| Hussman Funds
Departures from systematic monetary policy distort behavior in ways that cause misalignments between financial quantities and real economic quantities, and as a result, they invariably produce damage as the two are ultimately realigned.| Hussman Funds
Record stock prices here are the product of a) record valuation multiples that have been inflated by a decade of zero interest rate policy, times b) record earnings that embed distorted profit margins inflated by trillions of dollars of temporary deficit spending. Investors are paying top dollar for top dollar.| Hussman Funds
The heady optimism in forecasted earnings is hiding in aggressive expectations for profit margins. The rise in market valuations has been much more tightly linked to those elevated margins - and expectations for even higher margins next year and the year after - than investors may realize. If the widely held belief that public companies will perpetually become more profitable begins to falter, the steep valuation premium that has been priced into U.S. large-cap stocks over the past decade may...| Hussman Funds
Equilibrium is like conservation of mass – every purchase is also a sale; every security that’s created must be held by someone until it is retired; the shortfall of one sector must be the surplus of another. Once you insist on thinking in terms of equilibrium, it becomes obvious how many discussions in economics and finance are incoherent.| Hussman Funds
What drives investment returns? Can you simply buy stocks at any price and assume you'll enjoy long-term returns on the order of 10% annually? The answer is no. Unfortunately, the financial industry often encourages investors to imagine this is how markets work. Is there some meaningful structure that drives returns? The answer is yes. Understanding it offers clear insights about how we got here, and where we may be going.| Hussman Funds
There are certain features of valuation, investor psychology, and price behavior that emerge, to one degree or another, when the fear of missing out becomes particularly extreme and the focus of speculation becomes particularly narrow. We’ve suddenly hit a motherlode of those conditions. Emphatically, this is not a forecast. It's a statement about current, observable conditions.| Hussman Funds
There’s a very rare set of market conditions extreme enough to deserve a ‘warning.’ As Madge said in the old Palmolive dish soap commercials, ‘you’re soaking in it.’| Hussman Funds
I may as well just say it. Based on the present combination of extreme valuations, unfavorable and deteriorating market internals, and a rare preponderance of warning syndromes in weekly and now daily data, my impression is that the speculative market advance since 2009 ended last week. Barring a wholesale shift in the quality of market internals, which are quickly going the wrong way, any further highs from these levels are likely to be minimal. In contrast, current valuation extremes imply ...| Hussman Funds
There are certain features of valuation, investor psychology, and price behavior that tend to emerge when the fear of missing out becomes particularly extreme and the focus of speculation becomes particularly narrow. On Friday, May 24, we hit a fresh “motherlode” of these conditions.| Hussman Funds
The stock market presently stands at valuation extremes matched only twice in U.S. financial history: the week ended December 31, 2021, and the week ended August 26, 1929. Meanwhile, despite all the bluster about technological improvements driving durable increases in corporate profitability over time, the fact is that corporate profit margins before interest and taxes have hovered around the same level for 75 years.| Hussman Funds
Statistically, the current set of market conditions looks more “like” a major bull market peak than any point in the past 75 years, and I suspect, any point other than the 1929 peak. As Jeremy Grantham recently observed, "This is where you start bear markets from."| Hussman Funds
The S&P 500 is two years into what we expect to be a very long, interesting trip to nowhere. The strongest stock market returns in the coming decade, perhaps longer, are likely to emerge during advances in the S&P 500 that attempt to catch up with the cumulative return of risk-free Treasury bills. Recall that investors experienced the same outcome between 1929-1947, 1968-1985, and 2000-2013.| Hussman Funds
The yearning affection that investors hold for Fed pivots is quietly driven by the fact that nearly all the pivots occurred when the S&P 500 already stood at historically normal or depressed levels of valuation. The associated market returns were typically a function of two factors: favorable valuations, coupled with an improvement in market internals. It’s those factors – the central elements of our investment discipline – that actually correlate with favorable market outcomes.| Hussman Funds
In every noise-reduction problem, uniformity matters. There is vastly more information in the common signal drawn from multiple sensors than there is in any single measure by itself. While we still don’t have enough data to anticipate a recession with high confidence, my view is that the sudden enthusiasm about a 'soft landing' runs exactly opposite to the trend of the data.| Hussman Funds
There’s no question that Fed-induced speculation encouraged investors to chase extreme valuations, and to accept low returns on every class of investments. Unfortunately, Fed policy does not change the arithmetic that links valuations with subsequent returns. By our estimates, the S&P 500 is likely to lag Treasury bonds, and even Treasury bills, for more than a decade. Now comes the hard part.| Hussman Funds
