Registered Investment Adviser Caleb Lawrence
Disappointing data and rising tensions with North Korea sent the major averages into the final hour with large losses. The July Producer Price Index slipped .1%, on a year ago basis prices gained 2%, unchanged from the previous month. Price declines were broad based but particularly notable in unprocessed goods.
John Hussman who noted that the Standard and Poors 500 Index reached a median over valuation of 178% of a basket of valuation metrics in 2000 implying a 64% loss probability prior to the bust that ultimately saw a decline of 50.5%. In 2007 the overvaluation was just over 95% implying a decline of 49%, the actual figure was 57.7%. Fast forward to the present and the index is now 170% overvalued nearly matching the Dot Com bust peak, implying a market loss of 63%, which would take the index down to about 1,150. The point being is that while the market may rise from here the gains achieved will be on a par with picking up pennies in front of a steam roller based on valuations alone as the possibility of a 10% gain does not justify the possibility of a 60% loss. This is what is meant by risk adjusted return. Hussman went on to note that the 63% implied loss is not an extreme probability but an average expected outcome. Similar valuation issues plague real estate as they did in 2007 and I would expect a similar outcome.