Email of the day on the bearish perspective
Comment of the Day

November 07 2018

Commentary by Eoin Treacy

Email of the day on the bearish perspective

I have been a subscriber for almost a decade and enjoy listening to your video presentations and reading the comments. No hurry, but would be great if you can spare your time to offer your thoughts on Dr. John Hussman's comment, link here: 

Eoin Treacy's view

Thank you for your support and for this article which may be of interest to the Collective. Here is a section:  

It’s important to recognize that despite its discomfort, the market decline we observed in October is only a drop in the bucket toward normalizing valuations. I’ll say this again, because it is important. Over the completion of the current market cycle, I fully expect the S&P 500 to lose close to two-thirds of its value from the recent peak. We don’t require this outcome as a precondition for adopting a bullish market stance, as an improvement in market internals alone would encourage a neutral or even constructive market outlook (though with a safety-net given present market extremes). The problem is that there is no market cycle in history, even at the 2002 low, that ended at market valuations greater than half the level they established at the recent peak.

This is clearly not a favorable outlook for passive investors. While investors have embraced passive strategies as a result of strong backward-looking returns, this popularity represents little but performance-chasing at the most extreme valuations in history. At the recent market peak on September 20, we estimate that the prospective 12-year total return from a conventional passive asset mix invested 60% in the S&P 500, 30% in Treasury bonds, and 10% in Treasury bills reached a low of just 0.48%. There is only one instance in history when these estimates were lower, which was in the 3 weeks immediately surrounding the 1929 market peak. Given that most pension funds assume future returns in the range of 7% annually, it implies that the coming years are likely to include a rather widespread pension crisis.

Shorter-term, remember that bear markets regularly include scorching advances from oversold conditions, each time prompting dip-buyers to exclaim “New highs, here we come. Am I a genius or what?” and encouraging long-term investors to breathe “Phew, I’m glad that’s over.” A typical bear market includes several waterfall declines, along with multiple interim recoveries approaching even 10-20%.

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