On Friday, November 8, all 3 of the major U.S. stock indices, the Dow Jones Industrial Average, NASDAQ, and the S&P 500, all closed at all-time record highs. As a whole, the U.S. stock market has been soaring recently, bringing untold ‘paper profits’ to millions of investors. However, there are people associated with the market that believe it to be significantly overvalued. Fund manager John Hussman points to the following measures in his weekly Hussman Funds Newsletter during the first week of November:
- Cyclically adjusted price-earnings ratio (current P/E is 25X vs. 15X average)
- Market cap to revenue (current ratio of 1.6 vs. 1.0 average)
- Market cap to GDP (double the pre-1990s norm)
These are not just slightly overvalued indicators, they are grossly overvalued indicators. In his same newsletter, Hussman provides commentary that supports his claim that the stock market crash that is forthcoming will be extreme, somewhere in the 40% – 55% range. Such a retreat of the major indices would put the DJIA below 8,000 and the S&P 500 below 900. While no one has a crystal ball and knows for sure if this will happen, expert investor and fund manager John Hussman believes it will. Agreeing with Hussman is current Business Insider CEO and former top-ranked Wall Street analyst, Henry Blodget. According to Blodget, all of the valid valuation models that he has seen indicate to him that the market is at least 40% overvalued. Blodget points to the same measures as Hussman, but also adds commentary on the Federal Reserve Z.1d Flow of funds data in his article that appeared on the Business Insider website on November 9. Blodget goes on to say that had similar concerns and correctly predicted the 2007 market peak.
Why is it important to understand that some financial “guru’s” believe that the stock market is in for a significant beating? So that you can evaluate for yourself if you want to keep putting money into a mechanism that some people with greater than average skill sets believe will only be worth half of what it is today, sometime in the near future. At the other extreme, you can guarantee yourself almost no return on your principal by investing in a certificate of deposit at a local bank. We also know that hiding your life savings under the mattress or burying it in the backyard is not only unsafe, but foolish. There are investment products that are not correlated to the stock market or can act as a hedge. In the world of finance, a hedge is a financial instrument used to reduce substantial losses from exposure to risk in another financial instrument. For example, you currently have significant capital gains exposure in the stock market if you were to sell your portfolio today, in an attempt to avoid a potential 40% – 55% drop in the near-term overall market. EquiAlt advisors could show you how to leverage your current portfolio in order to take advantage of a hedge, allowing you to protect a portion of your investment assets from losses, even if the market decreases, as experts like Hussman and Blodget predict.