When we last checked in with John Hussman, one of the more intellectual investors who is generous enough to share his thoughts on a weekly basis, the recent batch of upbeat U.S. economic news had softened the edge of his bearish demeanour just a little: "The rate of deterioration," he said in his market note, "has eased significantly...." However, last week's strong U.S. payrolls report -- the one that sent the Dow Jones industrial average to its highest close since 2008 -- has done little to push Mr. Hussman any further.
This week's note, published on Monday, rebukes the stock market for confusing lagging and coincident indicators (which are looking upbeat indeed) with leading indicators. And leading indicators -- forget about Greece for the moment -- continue to build the case that the global economy is in trouble and that the stock market could easily correct by 25 per cent. Take that, anyone who thought Mr. Hussman was turning bullish!
"Presently, there seems to be an unusually wide gap between hindsight and foresight, both in the financial markets and in the economy," he said in this week's note. "In both cases, forward-looking evidence suggests weak outcomes, but recent trends encourage optimism and risk-taking."
The 243,000 jump in payrolls in January, which topped estimates for gains of just 140,000 -- and had just about everyone speculating that the U.S. economy was in such good shape that maybe the Federal Reserve would be re-thinking its monetary stimulus -- is part of this hindsight. Yes, the job gains suggest that economic activity has improved in recent months. But they don't suggest that economic activity will continue to improve.
"Indeed, job growth has typically been reasonably positive in the 1, 3, 6 and 12 months prior to a recession," he said. "Job growth was positive in the month prior to eight of the past 10 recessions, and in the three months prior to nine of the past 10 recessions. In other words, we shouldn't expect weak job reports to lead recessions...."
So what exactly would Mr. Hussman want to see to curb his bearishness? "While we track a very broad set of data, a crude but useful rule of thumb is that the combination of a) an upturn in the OECD leading indicators (U.S. and total world), coupled with b) a turn to positive growth in the ECRI weekly leading index, has generally been a good sign that recession risk is receding. Those shifts can occur fairly quickly, but we don't observe them at present."
If you're scoffing at such ethereal-sounding indicators, you're probably not alone -- and that's likely why the market has seized upon more tangible and positive-looking indicators such as job gains: "The problem is that even though investors know that lagging data lags, it deals with actual recent outcomes that can be 'seen and touched'. In contrast, even though investors know that leading data leads, it deals with unobserved future prospects that have not yet been realized," Mr. Hussman said.
"It's natural to focus attention on what can be seen and touched, even if it's not indicative of the future."