March 9 (Bloomberg) — U.S. stocks rallied so much during the past year that they are vulnerable to a slump as interest rates rise and inflation accelerates, according to John Hussman, who oversees about $7 billion at the Hussman Funds. The CHART OF THE DAY shows how the Standard & Poor’s 500 Index has performed since hitting bottom a year ago today, when it reached a 12-year low. The yield on 10-year Treasury notes and the rate on three-month Treasury bills, based on data compiled by Bloomberg, are also included.
Treasury yields are higher than they were six months earlier, as depicted by the chart’s white lines. The Federal Reserve’s discount rate, charged on direct loans to banks, and the year-to-year rate of change in the consumer price index also rose during that time.
When combined with the S&P 500’s 68 percent surge from last year’s low and its historically low dividend yield of 2 percent, these conditions show stocks are poised to hit an “air pocket,” Hussman wrote yesterday in a report. Prices may fall 10 percent or more in about six weeks once that occurs, the report said. Hussman based the estimate on three other periods when the S&P 500 had 12-month gains of more than 30 percent and all the other criteria were met. They included September-October 1987, shortly before the Black Monday crash. The others were August- October 1999, close to the end of the “Internet bubble” years, and September-December 1955.
“We are already defensive” because of concern that stocks have risen too much and too soon, Hussman wrote. “The pressures we’re seeing on the yield front make our aversion to market risk somewhat more pointed.”