John Hussman: Stocks are priced to disappoint for a decade
Dec 14th 2009 5:30PM
Updated Dec 15th 2009 11:50AM
Hussman's hardly a household name, but the highly successful money manger's funds -- Hussman Strategic Growth (HSGFX) and Hussman Strategic Total Return (HSTRX) -- have delivered annualized returns of 8.6% and 7.9%, respectively, since their 2000 and 2002 debuts. (They're cheap, too: The growth fund's net expense ratio comes to 1.09%, while total return charges just 0.79%.)
Meanwhile, the S&P 500 ($INX) is off nearly 25% since Dr. Hussman (he has a Ph.D. in economics from Stanford) started his first fund. In other words, when Hussman talks, people listen, and what Dr. John is saying is that stocks look cheap only compared to the record bubble levels of 2000 and 2007. Heck, they've nearly matched their richest valuations ever observed prior to 1995, Hussman told clients Monday.
"While it is quite true that valuations have been higher for the majority of the period since the late 1990s, it is equally true that the total return of the S&P 500 over that period has been dismal," writes Hussman. "Stocks are overvalued to a level from which uninspiring returns have always followed. That fact is true regardless of whether or not the economy is in a sustainable recovery."
Sure, in the near-term stocks can climb, thanks to speculative bets placed by big institutional money driving shares higher, Hussman says. But longer term, equities looked poised for a long period of historical underperformance.
"The S&P 500 is currently priced to deliver total returns averaging about 6.1% annually over the coming decade," says Hussman. How lame is that? Returns that low were equaled at the market peaks of the 1960s, early 1970s and 1987. Indeed, lower prospective returns were observed only during the late 1990s, which was followed by 10-year returns below 6.1% annually.
Recall that stocks historically return 10% annually (before inflation) and you can see how today's lofty share-price levels could be setting investors up for too little reward considering the risks they're taking. As Hussman says: "When stocks are overvalued, one does not get to have his cake and eat it too without getting indigestion later."