Weekly Commentary, September 25, 2017
John P. Hussman, Ph.D.
"So the mindset, I think, goes something like this. Yes, market valuations are elevated, but, you know, low interest rates justify higher valuations. Besides, thereâ€™s really no alternative to stocks because youâ€™ll get what, 1% annually in cash? Look at how the market has done in recent years. Thereâ€™s no comparison. Value investors who thought stocks were overpriced in recent years have been wrong, wrong, and wrong again, and even if theyâ€™re eventually right, being early is just the same as being wrong. The best bet is just to invest in a passive index fund for the long-term, and ignore the swings. Thereâ€™s really no alternative."
"Whatâ€™s notable about this mindset is its excruciating reliance on three ideas. The first is that low interest rates â€œjustifyâ€ rich valuations. The second is that market returns simply emerge as a kind of providence from a higher power, perhaps magical gnomes, or the Federal Reserve if you like, and that those returns have no particular relationship to valuations even in the long-term. The third is that market returns during the recent advancing half-cycle are an accurate guide to future outcomes."