Cullen Roche excerpted John Hussman discussing why he (Hussman) is still in the recession camp, he thinks it is the most likely outcome, and why a 25% decline for equities is likely.
Hussman is commonly believed to be a permabear. For purposes of this post we'll set that question aside. He has been bearish for quite a while and over short bursts of time the performance of the Hussman Strategic Total Return Fund (HSTRX) has lagged the market considerably but longer term he has delivered a result that I believe is consistent with managing for a full cycle result not a quarterly or even annual result.
In 2011 HSTRX was about in line with the S&P 500. For five years the fund is up 12% plus dividends versus a decline of 7% for the S&P 500 on a price basis. Since the March 2009 low the fund is up 10% while SPX is up 95% (all the numbers come from Google Finance). You can decide for yourself on the performance but the fund definitely smooths out the ride for shareholders.
Hussman lays out why the market being higher than it was six months ago and the PMI coming in recently at 54 are not an all clear signs. He equates now to May 2008 when he said the worst was yet to come and he was criticized back then for this opinion. He does concede that things are not as bad now as they were then.
Last summer I wrote that I thought a recession had started. The market had turned down pretty quickly and many of the data points turned down similarly. While I do believe something bad was going on the recession call was probably wrong--I say probably because these things are dated well after the fact but at this point I can't see a recession being dated to last summer.
Evidence that I believed this call was wrong can be dated back quite a few months to selling what was left of our 2X inverse ETF and then making three purchases, thus increasing exposure, subsequently. As I mentioned the other day if you actively manage a portfolio you probably have opinions about what is going on now and what is coming next. When you are right then you just need to go with it but when you are wrong you need to adapt.
While we can always adapt more I think Hussman draws so much criticism because it looks like he doesn't do a whole lot of adapting when he's looking wrong. I can't be certain but lagging by 85% over a three year lift supports the idea that he did not adapt a whole lot. Having opinions and being wrong some portion of the time is ok and is going to happen, the important thing is what you do when you are wrong.
If things turn south again (they will at some point as a function of normal cyclicality) we will heed the 200 DMA and maybe sell a few things or use an inverse fund or maybe some combo of both. Getting defensive doesn't necessarily require a lot of trading.
To Hussman's comparison of now and May 2008, there is at least one huge difference. Back then we did not really have any idea of what awaited us, collectively anyway. At this point I believe we understand the crisis and how bad it is, what we don't yet understand, in my opinion, is how we get out if this mess--I don't think we know how we get back to "normal." Those are different things with different risks and I don't think we are at much risk for a 25% decline unless we get a fast 15% lift from 2011's close.
The above is an opinion and if it turns out to be incorrect I will adapt.
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9 comments:
Roger,
I think you intended to discuss Hussman's main equity fund, which is the Hussman Strategic Growth Fund (HSGFX). The one you did discuss, HSTRX, is his bond-like fund. Hussman himself invests almost all of his assets in HSGFX, and that's the one where his goal is to beat the S&P 500 over the full stock market cycle with lower volatility than the S&P 500.
I read Hussman religiously every week. I think he's fascinating and brilliant. He's also remarkably willing to discuss his failures. He's looked quite bad for the last few years, there's no denying that. But if there's a big downswing in the market he'll look like a genius again.
- aagold
Long-time reader, first time commenter. I agree with aagold here, HSGFX is the fund to look at. I use this fund religiously in the portfolios I advise and own it personally...its risk-reward profile is excellent and its a useful diversifier. Extreme patience is required, however, and it must be held through at least one (preferably more) market cycle. Regards,
Andy C.
People like to throw out the term "market cycle" a lot.
When asked about, no one ever seems to a) want to or b) is able to answer: where we are now - in what cycle.
More Wall street jibberish IMO.
When asked about, no one ever seems to a) want to or b) is able to answer: where we are now - in what cycle.
a. Market cycle = 1 bull market + 1 bear market, example March 2003 through March 2009, really that tough to comprehend?
b. Well....duh, of course they are only perfectly identifiable in hindsight. If anyone could perfectly identify in real-time, they should be trading S&P futures and should own the world in about 5-10 years
I have to agree with Anonymous 8:55
Cycles (bull and bear phases) can be described by the hour, day, week, month, year, decade, ad naseum.
Hussman is describing long cycles...but a clcly can't be described until it has passed.
Buy and hold thru the entire "cycle" is almost what Hussman has said....he is holding hid beliefs until the cycle is over...whatever the hell that means. Hussman may be right,,,and perhaps we will know in 50 years.
So MIke,
Do you talk to your clients this way? Your history of nasty retorts here is not forgotten.
Don't I recall one of your questions around 2009 (to Roger) was "How do I show value to my clients?"
Uh, hello...
Do you talk to your clients this way?
No, so far they haven't hit me with inane questions. If they did, I'd answer it more tactfully than on a blog.
Your history of nasty retorts here is not forgotten.
Am I supposed to be concerned?
Now really, if we are going to talk bull and bear cycles over minutes, days, weeks, that is just downright stupid and silly. We are talking investing here, not day trading or swing trading.
Obviously, we are talking about stock market price moves that persist over many, many months to years. Is someone really going to argue that 1996-2000 was part of a bull cycle while 2000-2002 was the bear cycle. Really? Seriously?
Sure, we can nitpick and argue whether something like October 1998is part of the bull cycle or its own bear market, but that sort of parsing gets really silly really quick.
At some point in the future...I don't know when...if I did I'd go 100% in SPX puts right before...the market will decline 20, 30, 40% peak to trough over some period of many months to a year or so. There is your bear cycle. Just because you can't identify it in real-time doesn't mean it doesn't exist.
To Mike C:
Where we are in the cycle is the crux of Hussman's strategy. I've also been a Hussman reader and owned both his original funds. I switched to the Total return as an Absolute return portion of my portfolio. In hussman's own words, he missed the call on the upswing, and has modified his model. He has now called for a recession, and a drop in the market. He has invested accordingly. When all is said and done, you can buy and hold on for dear life, buy and rebalance, or develop a timing strategy that protects your capital from permanent impairment. The ongoing discussion about whether you predict the Bull and Bear correctly only impacts the third strategy, not the first two. The DZ are buy and hold, and pretend that capital loss is an illusion solved by time, which works if you don't need the capital during time horizon of the fall and recovery. Rebalance works on paper, it requires discipline and a fixed income alternative, which has not been available for several years domestically, and will be unavailable for several more. The third strategy requires calling a future market and taking appropriate action. That means knowing where you are and where the market is going. It's not an easy call, and it's not obvious, or an inane question. If you are an advisor, and practice the third strategy, you will need to be able to answer that question with authority. That's why Hussman puts his bacon in the frying pan every week, and Swedroe gets to blow it off as not a meaningful question.
Staying bearish through an entire cycle? That is a permabear. Avoid anyone who invests based on economic forecasts.
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