John Hussman, the U.S. economist who runs Hussman Funds, has consistently resisted buying into any short-term market rallies.
In his latest weekly letter to clients, he warns that “the present market environment warrants unusual concern.”
The problem is that the risk-reward profile of the stock market has become far too negative. He is now calling for average annual gains for the S&P 500 of 4.8 per cent over the next decade. (That figure is slightly higher than his forecast last summer). But those gains come with heavy risks, and for investors to see 10 per cent returns again would require the S&P first to tumble, from about 1,200 today to 800.
“Presently, avoidance of major market losses takes precedence in our analysis,” Mr. Hussman writes.
Among the many factors he weighs: the percentage of advisory bears dropped below 30 per cent last week, which has historically resulted in “unrewarding market outcomes when valuations have been elevated even to a lesser extent than they are today.”
He also cites negative earnings pre-announcements, which are now exceeding positive ones by the largest ratio since mid-2001, and forecasts “a very high probability of oncoming recession.”
On Europe, he says optimists who are expecting the European Central Bank to buy distressed sovereign debt are in a pipe dream. Not only would the ECB need to win Germany's consent, but the treaty holding the EU together would need to be changed, because in its current form the ECB is not allowed to finance public sector obligations.