By: John Morgan
December 3, 2013
There is not a single valid monetary, economic or technical reason — except for “blind faith” in the Federal Reserve’s unprecedented quantitative easing campaign — that would justify the posh gains in the stock market during the past year, according to fund manager and Fed critic John Hussman.
In his weekly commentary, Hussman, president of the investment advisory firm that manages the Hussman Funds, wrote, “We’re faced with a speculative advance that seems unstoppable, despite the absence of any reliable mechanistic link between quantitative easing and stock prices — only a combination of superstition and yield seeking that has repeatedly ended badly.
“What’s driving capitulation here is not evidence, or even the faint memory of cycles as recent as 2000 and 2007 — but pain, impatience, career risk, and the demand that all discomfort must arise from conventional behavior.”
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Hussman predicted the current bull market will end the way many of them do — that is, when everyone is invested and there is no one left to buy stocks. He noted the percentage of bearish investment advisors is now the lowest in about 25 years.
“We are observing overvalued, overbought, overbullish extremes that are uniquely associated with peaks that preceded the worst market losses in history,” he said, adding that stock speculators are grossly overleveraged, with NYSE margin debt jumping in November to 2.5 percent of GDP in relative terms.
“I believe that more than half, and perhaps closer to all, of the market’s gains since 2009 will be surrendered over the completion of this cycle,” Hussman asserted.
Ed Yardeni, president and chief investment strategist at Yardeni Research, is considerably more bullish than Hussman. Yardeni wrote on his blog that the bull market’s perma-bears have consistently underestimated the rebound in earnings since 2009.
Yardeni said some bearish strategists have adopted a pretzel logic whereby they claim stocks are significantly overvalued relative to “normalized” earnings, which by their estimation are lower than actual earnings.
“Of course, since the perma-bears have been predicting an imminent ‘endgame’ scenario since the start of the bull market, their latest spin is clearly just a variation on their bearish theme,” he wrote.
USA Today reported that in the huge 2013 stock rally, the rising levels have not been led by a few overhyped “story stocks,” but by a broad participation of nearly all stocks in the S&P 500, which is generally considered a very bullish sign.
The breadth of the rally has been far superior than in 1999 and 2007, the years of the past two stock market tops, the newspaper reported.
“The punch line is that narrow markets are more consistent with market tops,” said Chris Verrone, analyst at Strategas. “Not much evidence of that right here.”
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