Hussman Weekly Market Comment: Did Monetary Policy Cause the Recovery?

As investors, we should be aware that the current Shiller P/E of 24.8 (S&P 500 divided by the 10-year average of inflation adjusted earnings) is now above every historical instance prior to the bubble period since the late-1990's, save for the final weeks approaching the 1929 peak. We should also be aware that overvaluation alone in the late-1990’s did not stop the market from reaching even higher levels as new-era speculation culminated in the 2000 bubble peak.

It’s fine, and quite accurate to say that valuations are not as frenzied as they were at the 2000 extreme (a comparison that fell from the lips of Robert Shiller himself last week), provided that one also recognizes that the hypervaluation in 2000 has been followed by a period that included two separate market losses in excess of 50%, and a nominal total return from 2000 until today averaging just 3.2% annually. Even that weak 13-year return has been achieved only thanks to distortions that have again driven present valuations to temporary and historically untenable extremes.

Put simply, the past 13 years have chronicled the journey of valuations - from hypervaluation to levels that still exceed every pre-bubble precedent other than a few weeks in 1929. If by 2023, stock valuations complete this journey not by moving to undervaluation, but simply by touching pre-bubble norms, we estimate that the S&P 500 will have achieved a nominal total return of only about 2.6% annually between now and then.