Global market turmoil reveals that an abrupt slowdown in world economic activity is now underway, and Americans should prepare for the storm, according to stock market analyst John Hussman, owner of the Hussman Funds mutual fund family.
Hussman, a critic of ultra-loose monetary policies by the Federal Reserve, said the first salvos of the slowdown are evident in widening credit spreads, deteriorating market internals, plunging commodity prices and collapsing yields on government debt.
Such trends tend to eventually lead to declining sales and production figures, followed by higher unemployment, he said.
“While Wall Street talking heads seem unanimous in viewing the decline in oil prices as ‘stimulative’ for the global economy, on the notion that it frees up spending money for other purposes, the problem is that the decline in oil prices is indicative of a retreat in global demand,” Hussman wrote in a weekly commentary.
“Unfortunately for monetary authorities around the world, the same is true for interest rates here. Attempts to press interest rates to preposterously low levels aren’t stimulating demand for borrowing, because the global economy is already submerged in its own indebtedness.”
Hussman said that if the U.S. was still in an environment where investors were risk-seeking, then overvalued markets might have a tendency to become even more overvalued.
“But once internals and credit spreads deteriorate, as they have been doing in recent months, compressed risk-premiums have a tendency to normalize — not gently, but in spikes, which we observe in price action as air-pockets, free-falls and crashes.”
Hussman predicted that when the artificially low interest rate environment comes unraveled, the assets that will be hit first are junk bonds, followed by stocks, then high-quality corporate bonds and Treasury debt.
By his estimation, the S&P 500 is now beyond the peak valuation of every market cycle on record (including 1929) except for the final quarters surrounding the 2000 bubble, and investors should “understand that stocks are no longer an investment but a speculation.”
“For now, we maintain a sharply negative outlook toward equities,” Hussman concluded.
According to data compiled by GaveKal Capital, the world’s central bankers may be losing their battle with deflation.
The investment advisory firm estimated the year-over-year change of the consumer price index (CPI) of 33 countries it tracks has fallen for eight straight months and now sits at only 1.42 percent. Among them, 11 of the 33 countries GaveKal monitors now have a negative (or no change) year-over-year percentage rate in their CPI, and the firm’s producer price index (PPI) proxy has sunk down below -2 percent.
To be sure, not every financial analyst shares a doom and gloom outlook when it comes to U.S. stocks, at least.
Eric Nelson, CEO of Servo Wealth Management, said his firm’s research concludes U.S. stocks are in a typical recovery period following the 2008 financial meltdown.
“Many investors are convinced that stocks are wildly overvalued after significant gains since 2009. The S&P 500 is up over 17 percent annually from 2009 through 2014,” he wrote in a market commentary.
But Nelson said that performance compares in line with the average aftermath of other bear markets since the Great Depression.
“The S&P 500’s 17.2 percent annualized return is par for the course; similar results were seen in the six years after the Great Depression (1933-1938) and 1975-1980. Only the 2003-2007 period saw more muted results (+12.8% per year).”
[by John Morgan, writing for NEWSMAX FINANCE]
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NORM ‘n’ AL, Minneapolis