AFMC - Cluster Of Woe

2024-02-06 10:51:00 ET

Summary

• The total return of the S&P 500 remains behind Treasury bills since its January 2022 peak more than two years ago.
• Amid the enthusiasm and now nearly unanimous consensus that recession risk is behind us, I’ll reiterate our own view: the data remain consistent with a U.S. economy at the borderline of recession, but we would need more evidence to expect that outcome with confidence.
• A favorable shift in market internals would encourage us to adopt a neutral or constructive outlook (albeit with position limits and safety nets) even amid current overvalued, overbought, overbullish extremes.

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. From a valuation standpoint, there is no ‘tradeoff’ between return and risk. Rather, depressed valuations tend to be followed by both strong long-term returns and modest subsequent losses, while extreme valuations tend to be followed by both poor long-term returns and deep subsequent losses.

Recall that the S&P 500 lagged Treasury bills from 1929-1947, 1966-1985, and 2000-2013. 50 years out of an 84-year period. When the investment horizon begins at extreme valuations, and doesn’t end at the same extremes, the retreat in valuations acts as a headwind that consumes the return that would otherwise be provided by dividends and growth in fundamentals.

– John P. Hussman, Ph.D., Return-Free Risk , January 2022

The total return of the S&P 500 remains behind Treasury bills since its January 2022 peak more than two years ago. Meanwhile, the technology-heavy Nasdaq 100 is only even with Treasury bills since the preponderance of warning flags I noted in our November 2021 comment, Motherlode . As I observed last month, 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....

For further details see: