Hussman Economics still bearish on stocks and the economy:
The Market Climate remains characterized by extremely unfavorable valuations and unfavorable trend uniformity. There remains a good chance of a shift to a
Crash Warning this week, but we don't move in advance of such shifts. In any event, we remain nearly fully hedged at present, so a Crash Warning would
involve only a marginal change to our position.
I just don't understand the view that the economy is turning here. There is simply no reliable evidence of this. If stock market rallies - even rallies of 20% -
were signals of economic rebounds, then we got 5 of those signals all the way down into depths of the Great Depression. Stock market changes have long
been one of the important elements of our Recession Warning composite. The market certainly gives useful signals, particularly when taken along with the
NAPM index, credit spreads, and other indicators. As I reported at the time, our Recession Warning composite was triggered in October 2000; a signal which
typically occurs just before or very early into U.S. recessions, and certainly did in that instance. Interestingly, one of the important negative signals in that
composite is simply whether the S&P is below where it was 6 months earlier. As it happens, the S&P is still below where it was 6 months ago. There just
isn't much useful leading economic information to be drawn from the recent rally.
Most of the "evidence" for an economic rebound is derived from circular reasoning. The hope for an economic rebound has spurred the recent market rally,
and the rally, in turn, is being taken as evidence that the economy is about to recover. The Fed is 0 for 11, with no signs that the string of rate cuts has been
effective. But instead of recognizing that the Fed Funds rate is an irrelevant price and that the entire increase in the monetary base has been drawn off as
currency in circulation, analysts keep saying that these rate cuts are "in the pipeline." These analysts are simply not looking at the banking statistics. It isn't
analysis to believe that rate cuts will "kick in", even though bank reserves are no larger than they were a year ago. It's superstition.
A few facts. No recession has ever ended with our measures of trend uniformity negative. No recession has ended with the Dow Utility average below its
12-month average. No recession has ended with the "future expectations" measure of consumer confidence below the "current conditions" measure. The
reliable indicators are almost uniformly on the downside here.
In contrast, the indicators being hailed as evidence of a pending recovery just don't have a robust correlation with economic turns.
This recession is unusual in that it began with a business downturn while consumers have largely offset that decline. GDP is not even down year-over-year.
My expectation is that consumer activity is about to slow enough that it will fail to offset the business downturn. Now, consumer spending never really falls
year-over-year. As much as people focus on consumer spending, the entire decline in GDP during a recession takes place as a contraction in fixed investment,
housing, and capital spending, not consumption. But the growth in consumer activity has largely buffered this decline so far. That is likely to change.
Nobody seems to be considering the possibility that the consumer will join rather than offset the downturn in the months ahead. As usual, dollar weakness
would likely signal a fresh downturn in the economy.
As usual, the most constructive evidence we could get would be a shift to favorable trend uniformity. It would increase our willingness to take on market risk,
and would improve our expectations for the economy. But here and now, the likelihood is leaning toward the Market Climate slipping to a Crash Warning.
Needless to say, that wouldn't be an improvement. |
