Quote from Ghost of Cutten:
No he didn't. He did not support his case with evidence e.g. declining earnings (sign of margin contraction), declining US GDP (evidence that Europe was going to cause a US/global recession). He simply speculated that it would happen. Well, now the data is rejecting his view - so his case is a bust, unless he is going to totally ignore it.
The bear case in June 2011 is quite different to the bear case today, because we have 3 quarters of new economic and earnings releases to update the picture. So, what's the bear case circa March 2012, and where are the facts to support it?
The thing is that Hussman's timeframe is quite long - years to a decade, not weeks or a couple of months.
For instance his recent bearish warning (based on valuations and price action) was something to the effect that current conditions have, on average, resulted in a 25% peak-to-trough market decline at some point over the 18 months following the signal. I suspect he regards a couple of months or quarters of 'positive surprises' as just noise, and while such a vague forecast has significant implications for buy-and-hold investors, it's almost meaningless for traders relying heavily on short-term momentum and technicals.
Incidentally, S&P 500 earnings apparently
fell in the fourth quarter. Under $24 a share operating earnings versus over $25 in the third. This is consistent with my impression that, except for a few high-flyers like AAPL, it's been a rather tepid earnings season.
Note in this connection that rising earnings do not necessarily imply rising prices, see the 1973-74 bear market. Moreover, forward operating earnings estimates and forward PEs appear to be worthless as market-timing devices, or indeed for any purpose other than Wall Street marketing materials. Every single year, analysts play a game whereby they forecast strong earnings for the following year - lots of growth, and implying low forward PEs - only to steadily reduce the estimates as the year goes on. Estimated EPS for 1Q2012 fell from $26.50 last July to $23.86 currently.
Going by operating earnings with no lookback or smoothing, the 2Q07 PE was only 15.5 - 4Q11 was 14.18. But stocks were the "cheapest they've been since 2000" right before a 50% market plunge. Operating earnings PE in the last half of 2002 (end of the first bear market) were between 18.5 and 19 - were stocks a poorer investment then than at present? OTOH Shiller PE shows that stocks have been badly overvalued ever since the late 90s but at least, by this measure, they're cheaper now than in 2007 and 2009 briefly approached fair value.
Forecasts based on valuation do not in any event imply anything whatever about near-term market direction: e.g. low 10-year returns can occur if the market crashes immediately, or doubles in eight years then crashes in the last two, or merely goes sideways. The implication of high valuations is that better valuations will be available at some point in the future (they always have been), but nobody has any idea of the timing or whether those lower valuations will be achieved by price falling, earnings rising or some combination of these.
Anyway, my take on all this is that there are a number of flashing red lights for the global economy (Chinese government lowering growth targets, recession in Europe, now we can add S&P earnings that are flat to falling). Price action is bullish but I do not trust it beyond the steepest uptrend line you can draw, we've in fact seen this movie twice in the last two years: a flood of monetary stimulus guns the market for a number of months, the rally terminates almost immediately once the stimulus program is completed, followed by the sudden emergence of some 'unexpected' new crisis prompting a repeat of the whole cycle.
If anything seems to be different about this cycle it's rather that the capacity for government intervention at the margins is significantly more constricted than in the past. Deficits and debt are a problem everywhere. We have outright hawkish talk from the ECB and BuBa (or what passes for hawkish talk these days), the aforementioned lowering of the bar in China and a Fed which appears reluctant to engage in full-bore QE yet again.
