Down goes the Dow

"Industry analysts in aggregate predict the S&P 500 will see a 10.0% increase in price over the next 12 months. This percentage is based on the difference between the bottom-up target price and the closing price for the index at the end of June. The bottom-up target price is calculated by aggregating the mean target price estimates (based on company-level estimates submitted by industry analysts) for all the companies in the index. On June 30, the bottom-up target price for the S&P 500 was 2308.65, which was 10.0% above the closing price of 2098.86."

“Investors have turned the market into a carnival, where everybody ‘knows’ that the new rides are the good rides, and the old rides just don’t work. Where the carnival barkers seem to hand out free money for just showing up. Unfortunately, this business is not that kind – it has always been true that in every pyramid, in every easy-money sure-thing, the first ones to get out are the only ones to get out… One of the things that you may have noticed is that our downside targets for the market don’t simply slide up in parallel with the market. Most analysts have an ingrained ‘15% correction’ mentality, such that no matter how high prices advance, the probable maximum downside risk is just 15% or so (and that would be considered bad). Factually speaking, however, that’s not the way it works… The inconvenient fact is that valuation ultimately matters. That has led to the rather peculiar risk projections that have appeared in this letter in recent months. Trend uniformity helps to postpone that reality, but in the end, there it is… Over time, price/revenue ratios come back into line. Currently, that would require an 83% plunge in tech stocks (recall the 1969-70 tech massacre). The plunge may be muted to about 65% given several years of revenue growth. If you understand values and market history, you know we’re not joking.”

– Hussman Econometrics, March 7, 2000

As it happened, the SPX dropped by half, and the tech-heavy NDX dropped by 83%. If one was attentive to valuations, the spectacular losses from the 2000 peak were actually right on target. And though the reasons to believe that “this time is different” are not the same as in 2000, the same lessons – and similar risks – are relevant to investors today.

John Hussman, Weekly Commentary 4/28/2015

"If a person can be too smart for his own good, as the aphorism goes, portfolio manager John Hussman may be feeling the agony of high intelligence right about now....Hussman’s persistently poor performance is an object lesson in the futility of trying to outsmart the market, a temptation to which some very smart people succumb either through security selection or market timing."

From "Hussman's Returns, Like His Forecasts, Are Dismal"

Research Magazine

"As for other investors, the worst mistake they made prior to the 2000-2002 collapse was to believe Wall Street’s claims that stocks were not in a bubble, and that this time was different. The worst mistake that other investors made prior to the 2007-2009 collapse was to believe Wall Street’s claims that stocks were not in a bubble, and that this time was different. The worst mistake that other investors are making today is to believe Wall Street’s claims that stocks are not in a bubble, and that this time is different."

John Hussman, Weekly Commentary April 28, 2015

Still getting buried by the moderate risk target index I see. Just another reason to stay away. Thanks for the reminder.

Gil,

Un-fog your glasses. YTD versus moderate risk target index +4.60%, year-over-year +3.09%.

So sorry.

Igy

Unlike you, I'm not a market timer. The 10-year performance is much more meaningful to me. It should be for you, too, or are you saying you disagree with Hussman regarding "this time is different?"

Here's a nice quote for you: "The simple fact is that the

primary driver of the market here is not valuation, or even

fundamentals."

YTD versus moderate risk target index +4.60%, year-over-year +3.09%.

And still below where they were 5 years ago.

Facts,

So what, in case you haven't noticed the Fed is in a box and the NYSE Composite is below where it was at the May 2015 high, S&P 500 is up less than 2%. Think about where you are going and not where you have been.

Igy

Earnings will have to improve substantially if the market is to go up another 10%; IMO

So then you would suggest I use a smaller time frame? Ok, let's compare HSTRX over the past 3 months. Oops, not so good.

Your choice....

topcat,

Over the last eighteen months earnings have fallen 18.5% but the market has climbed 11%.

How does that fit into your thesis?

Igy

Gil Weinreich wrote:

Still getting buried by the moderate risk target index I see. Just another reason to stay away. Thanks for the reminder.

For most Americans, there is no reason to stay away from the stock market.

Most common reasons to stay out of the market before retirement:

1) You make a LOT of money and simply through saving you have your retirement taken care of.

2) You HAVE already made enough money on some other investment. This would have to have been in the past, not something to consider going forward.

Most Americans don't fit into those situations.

If you go back to the beginning of this thread, the Dow was at 14,850 and the OP was predicting below 13,000. Well, the prediction didn't come true, and now the Dow sits at 18,600. That's about a 25% increase (actually a tiny bit more).

So, if less than 3 years ago you had 1 million dollars in the Dow (other indices are similar), you would now have $1,250,000. And that doesn't include any reinvested dividends or obviously any additions you made during that time that today are all good buys because we are at about the highest level now.

Random people, news outlets at various times, goldbugs, "experts" have constantly said either very bad things about investing in the stock market or very cautionary things. The thing that trumps all of that is basically what Warren Buffet says which is to be in all the time.

Investing in the stock market though CAN be risky if you don't approach it in the right way. If you buy only individual stocks, that's too risky. If you take loans for everything under the sun so that you can invest, that's too risky.

Path to financial freedom is:

1) Become debt free other than HUGE student loan and mortgage as soon as you possibly can. Take extra jobs, sell stuff, live on the cheap to get those debts gone.

2) Create emergency fund of 3-6 months of expenses.

2) Invest 15% of your income or more into mutual funds within retirement vehicles (Roth IRA, 401k, etc.). These should be well diversified.

3) While continuing to invest, attack the big student loan and home mortgage. Ultimate goal is to have both gone before retirement, but well before if at all possible.

4) Once you are completely debt free, up your retirement investing to the maximum allowable. If you want to and can, also open a non-retirement mutual fund or set of funds.

5) Within 5 years of retirement, consider going a little more conservative with your investment choices -- more dividend-giving stocks or more bonds, OR have 3 YEARS of expenses liquid so that you can continue to invest more aggressively. You use that money if the market tanks. Eventually the market will come back. It ALWAYS does.

Flagpole,

I don't disagree with your advice. Good general advice for most people. The attached article offers a different view, that I think is worth the read.

https://realinvestmentadvice.com/bulls-bears-the-broken-clock-syndrome/

Igy

Flagpole, for the record I was referring to staying away from that Hussman fund, or any Hussman fund for that matter. There are obviously better options, but GOI seems to think "it's different this time". Folly.

Gil,

Broaden your horizons and read the article I linked above.

I dare you.

Igy

I read it yesterday.