Please note: This is an article I wrote last Friday for the McAlvany Intelligence Advisor. I’ve republished it here in its entirety:


Two of the most insightful market prognosticators, in my opinion, are John Hussman of Hussman Funds and Lakshman Achuthan of ECRI, the Economic Cycle Research Institute. When they agree, I get nervous.

In his March newsletter to clients, Achuthan noted that the recent bounce in the four coincident indicators that he follows (employment, industrial production, personal after-tax income, and sales) is distorted and will shortly be corrected back to support his thesis that the US is in recession and has been since last June. Wrote Achuthan:

Many companies and individuals pulled income forward from 2013 into late 2012 … Together with the rebound from [Hurricane] Sandy, this is part of the reason why manufacturing and trade sales likely received a year-end boost.

As these temporary distortions pass, those coincident indicators are likely to pull back to their earlier downtrends.

The latest employment report supports Achuthan’s recession call as well, while the sales numbers don’t, at least for the moment.

Hussman takes a different perspective, but comes to the same conclusion as Achuthan, and that’s what makes me nervous. This is from Hussman’s latest client newsletter:

My concern continues to be that investors don’t seem to recognize that margins are more than 70% above their historical norms.… As a result, investors seem oblivious to the likelihood of earnings disappointments not only in coming quarters but in the next several years….

For my part, I continue to expect the U.S. economy to join a global recession that is already in progress in much of the developed world….

Suffice it to say that the realistic case for a sustained economic expansion here remains terribly thin.

Couple these prognostications with the nearly parabolic upward move of market averages since the first of the year, plowing through negatives such as the sequester, the increase in payroll taxes, and the drop in personal savings, the rule of reversion to the mean is going to kick in, sooner perhaps than later. And any reversion to the mean is likely to decline through that imaginary level to some level much lower.

It’s helpful to remember that the low in the S&P 500 (SPX) was 667 in March 2009 and now trades at nearly 1,600, a gain of 139% in four years. During that same period, has averaged less than 2% annually. Any attempt to justify the current level of the SPX by looking forward is not reasonable.  As Hussman puts it,

Investors quite erroneously accept the distorted “earnings yield” of stocks (and the associated “forward price/earnings multiple” of the S&P 500) at face value….

Simply put, stocks are not cheap but are instead strenuously overvalued….

We presently estimate a prospective 10-year nominal total return for the S&P 500 of less than 3.5% annually. The likelihood of even this return being achieved smoothly … is roughly zero. (emphasis added)

On any horizon of less than about 6-7 years, we expect that any intervening returns achieved by the S&P 500 will be wiped out, and then some.



Taking Distortion at Face Value

The US Business Cycle


US GDP growth

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