The Great Divide: Outlooks From Bust to Buy
Ever since I first read a book by Ben Graham my sophomore year in college I’ve stayed pretty close to the markets. I don’t watch CNBC all day, but I do read a fair number of opinions and outlooks on the markets and equites. Rarely have I even seen such a divide between the bulls and the bears.
One camp is saying this is the cheapest stocks have been for decades and are poised for significant gains with some of the best run companies trading at market multiples. I’ve read countless articles mentioning current and former tech darlings Apple, Microsoft, Cisco, Intel as steals at current prices. Here is a recent video where Hank Smith, Chief Investment Officer of Equity at Haverford Trust, argues:
“that based on yields and price to earnings ratios (P/E), equities are cheap as they’ve been since the 1950’s, Smith is concentrating on big, dividend paying stocks to take advantage of the situation.”
The other side is arguing that equity markets are about to implode by a significant margin, mosty on concerns about a double dip recession and Eurozone’s fiscal woes. John Hussman of the Hussman Funds argues:
Increasingly … we have observed sets of conditions that are so heavily skewed toward bad outcomes that they deserve the word “warning” (see Extreme Conditions and Typical Outcomes near the 2011 peak, Don’t Mess with Aunt Minnie before the 2010 market break, Expecting a Recession in late 2007, A Who’s Who of Awful Times to Invest at the 2007 market peak, and our shift from a modestly constructive investment position to a Crash Warning in October of 2000).
While the downturns that followed have provoked increasingly large and desperate actions of central banks to kick the can down the road by preventing debt restructuring and financial deleveraging (in some cases by violating legal constraints - see The Case Against the Fed ), the fact is that the S&P 500 has achieved a total return of just 1.2% annually over the past 12 years, as a predictableoutcome of rich valuations and still-unresolved economic imbalances…
Once again, we now have a set of market conditions that is associated almost exclusively with steeply negative outcomes. In this case, we’re observing an “exhaustion” syndrome that has typically been followed by market losses on the order of 25% over the following 6-7 month period (not a typo).
It always takes a buyer and seller to make a market, but the divergence between the two appears as extreme as I’ve ever seen it.
What do you think?
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