1/ Quick update on market conditions.

Valuations have pushed to the most speculative extreme in U.S. history.

While valuations are informative about long-term and full-cycle outcomes, they are emphatically not useful indications of market outcomes over shorter horizons. 2/ Even taking record earnings and year-ahead earnings estimates at face value, using operating earnings that exclude extraordinary items, the S&P 500 price/forward operating earnings of 22 is at levels only seen at the 2000 and 2022 market peaks.

Again, not a near-term measure.

1/ One would think that with all the society-changing technological innovation since 2000, GDP growth and S&P 500 revenue growth would have been faster, not slower, than in the past. Investors make the repeated mistake of basing valuations on excitement instead of arithmetic. 2/ Consider the largest three tech stocks in 1999: Microsoft, Cisco, and Intel. Their total returns, respectively, since 2000 have averaged 10.38%, 1.88%, and -0.11%. Average 4.05%.

Seeing the largest companies go on to lag, as a group, is the norm, not the exception.

Notes on the Harris-Walz economic plan - a thread. 🧵

The elements of a strong plan are always productive investment, easing employment barriers, a level playing field so working families participate in what they produce, and reducing vulnerability.
“Over the past several decades, our economy has grown better and better for those at the very top, and increasingly difficult for those trying to hold on to a middle class life.”

[Productivity may not translate into living standards if tax policies reward profits over wages]

On average, how much does the 10-year Treasury yield fall during the 12-18 month period following the start of a recession?

It doesn't. On average, how much does the core PCE inflation rate fall during the 12-18 month period following the start of a recession?

It doesn't.

Quick update: Our most reliable gauge of valuations exceeds every point in history, including 1929 and 2000, except for 6 weeks surrounding the 2022 peak.

Of course, if extreme valuations were enough to drive the market lower, one could never reach extremes like this.

More... Market internals remain unfavorable and are deteriorating quickly, so there's an open trap door, but even internals don't label extremes.

"At present, the 'last straw' of market action that deserves monitoring in daily data relates to 'leadership.'"
hussmanfunds.com/comment/observ…

As "quantitative tapering" continues, you'll see an enormous number of bad takes about "collapsing" M2, bank credit and so forth.

It will help to understand it's not loans that are declining, but idle cash reserves, held indirectly by depositors, well in excess of FDIC coverage. 2/ QE didn't encourage greater lending by banks. Bank lending since 2008 has grown at just 3.4% - slowest growth rate in U.S. history.

QE created a pile of (previously) zero-interest reserves that someone had to hold, everyone wanted to get rid of, and in aggregate, could not. https://t.co/fMqmjfPWBytwitter.com/i/web/status/1…

Here are the "nearest neighbors" to current market conditions, based on dozens of individual models and classifiers of prospective return/risk. Sharing because it's unusual. Not a forecast. Just FYI.

See "Motherlode" for a discussion of similar ensembles https://t.co/CBmKZzww07hussmanfunds.com/comment/mc2111…
7/18/23: One of the many "compression/extension" syndromes I monitor - it's unusual to get this level of extension while our primary gauge of market internals holds unfavorable (as it is now).

When it does occur, the resolution can be sharp and quick. Not a forecast, just FYI.

1/ The S&P 500 has suffered a total return of -10.3% since its steepest extreme in history.

The valuation measure best correlated with actual market returns is at levels never seen prior to Aug 2020, except a handful of months surrounding the 1929 peak.

I know you don't care. 2/ The chart below shows the relationship between our most reliable valuation measure and actual subsequent market returns, in data since 1928

The largest bank failure in U.S. history - Washington Mutual - is unmemorable because it was resolved correctly. The FDIC under @SheilaBair2013, took receivership. Depositors lost nothing. Stockholders and unsecured creditors weren't bailed out by a hyperactive Federal Reserve. Under the “depositor preference” provision of Title 12, Section 1821(11)(A) of U.S. banking law, depositors receive preference over any other general or unsecured senior liability of the bank.

Stockholders and bondholders can and should lose, because they are supposed to lose.

The worst bank failure since the global financial crisis was basically a massive Fed-driven carry trade. The bank extended its maturities to chase any yield better than zero. Then rates left zero.

Over 60% of SIVB deposits were in cash, Treasury, and other govt securities. Meanwhile, as everyone looks to the Fed to defend banks from balance sheet losses, one might consider that the @FederalReserve is in the same situation. It just doesn't mark-to-market. It will recover its losses by retaining interest rather than returning it for public benefit.

1/ Quick status update

Our most reliable valuation measures remain extreme. Yes, they've retreated from the record blowoff the Fed encouraged by forcing the public to choke down 36% of GDP in zero-interest money, but that rate is now over 4%, and internals suggest risk-aversion 2/ Our most reliable gauge of market internals remains unfavorable. This can change, and we'll respond accordingly.

Valuations matter most when ragged/divergent internals suggest risk aversion (a trap door). Also, none of the gains during QE occurred amid negative internals.

We like to call this the "pre-fraud" valuation.

At a bubble peak, valuation stands for nothing, and speculators will fall for anything. As Walter Bagehot wrote in 1873, "people are most credulous when they are most happy."

The S&P 500 is down just 16.75% from its bubble peak.

https://twitter.com/ihartcharts/status/1591390089527300097

https://twitter.com/jingyanghk/status/1589591596118728704

My impression is "bubble" is often heard as "immediate collapse," but the current course is typical. Recall the S&P was still down only 14.5% from its March 2000 high by Dec of that year. Bubbles collapse, but it's enough shift with observables w/o relying on near-term forecasts.

https://twitter.com/ClintReiser/status/1566593306276122626

Quick note on the distinction between responding to observables and relying on near-term forecasts and scenarios.

Despite a hard initial decline, many (though not all) major peaks include an “exhaustion rally” that carries prices within a few percent of the high.

Our broadest drawdown-risk estimate just dropped among the most negative 2% in history. Just an observation, ignore at will.

https://twitter.com/hussmanjp/status/1559707085088120835

... preloading

“Will the Fed pivot?” is the wrong question. What matters is for investor psychology to shift from risk aversion to speculation. Fed easing doesn’t support stocks otherwise.

That psychology is best inferred from the uniformity of market internals, and no forecasts are required. For more on the interaction between monetary policy and investor psychology, see the section titled “The two forms of quantitative easing”
hussmanfunds.com/comment/mc2105…

ICYMI - new market comment is out
hussmanfunds.com/comment/mc2207… 2/ A reliable valuation ratio is nothing but shorthand for a proper discounted cash flow analysis. Your denominator should be representative and proportional to DECADES of future cash flows. For a data-rich examination of various metrics, see:
hussmanfunds.com/comment/mc2202…

1/4 In case the 30% drop in the forward P/E leads you to imagine that stocks are cheap, understand that part of that drop reflects a push in forward earnings estimates to subsidy-driven extremes 2/4 In addition to pandemic-related subsidies, understand just how much the record level of profits in recent years has benefited from depressed unit labor costs, which surged in the first quarter (chart through Q4 2021) and still comprise the majority of corporate expenses.

Current menu of estimated asset returns vs key historical extremes. The yield on the Dow Utilities now stands at the lowest level in history, aside from the week of 2/14/20. Utilities fell as hard as the SPX in the selloff that followed. In a bubble, the safe haven is discipline. Preloading - "what alternative is there?"

Valuations will not tell you where the top is or where the bottom will be. They do offer a good indication of the long-term returns you can expect from that starting point. As for interest rates, it's true that low interest rates can encourage higher valuations. But investors should realize that once those higher valuations are established, low interest rates do nothing to mitigate the poor long-term market returns that follow.

In honor and remembrance

"By relentlessly depriving investors of risk-free return, the Federal Reserve has spawned an all-asset speculative bubble that we estimate will provide investors little but return-free risk."
hussmanfunds.com/comment/mc2201… Notice that from a valuation standpoint, there is no “tradeoff” between return & risk. Rather, depressed valuations tend to be followed by both strong long-term returns and modest losses, while extreme valuations tend to be followed by both poor long-term returns and deep losses.