by John P. Hussman, Ph.D.
Hussman Funds
With the S&P 500 Index at the same level it set in early-November 2014, and the broad NYSE Composite Index unchanged since October 2013, the stock market continues to trace out a massive arc that is likely to be recognized, in hindsight, as the top formation of the third financial bubble in 16 years. The chart below shows monthly bars for the S&P 500 since 1995. It’s difficult to imagine that the current situation will end well, but it’s quite easy to lose a full-cycle perspective when so much focus is placed on day-to-day fluctuations. The repeated speculative episodes since 2000 have taken historically-reliable valuation measures to extremes seen previously only at the 1929 peak and to a lesser extent, the 1937 peak (which was also followed by a market loss of 50%). Throughout history, at each valuation extreme – certainly in 2000, 2007 and today – investors have openly embraced rich valuations in the belief that they represent some new, modern and acceptable “norm”, failing to recognize the virtually one-to-one correspondence between elevated valuations and depressed subsequent investment outcomes.