John P. Hussman, Ph.D.
Just a brief update this week as our annual board meetings are in progress – it’s notable that despite the brief reprieve of market concerns Thursday on tentative agreement over Greek aid, we actually saw very little change in the value of Greek debt. While there is a great deal of short-term attention on day-to-day developments on this front, credit spreads effectively indicate expectations of certain default within a roughly 2-year window, but very small risk of near-term default. Until we observe a firming in market internals (which have deteriorated markedly) and in leading economic measures (which have also weakened), we expect that enthusiasm about Greece may provoke short-lived market spikes and short-squeezes, but little of durable effect for the stock market.
For our part, we continue to focus on our measures of valuation and market action, both which are unfavorable at present. An improvement in the quality of market action could allow some latitude for a constructive market exposure, but with the recent advance past both the median extent and duration of cyclical bulls within secular bears (which I continue to believe is the appropriate characterization), the risk of significant market losses should not be underestimated. Presently, we estimate the prospective 10-year total return of the S&P 500 Index at about 4.2% annually, based on our standard methodology. This is better than we observed in May, but the modest improvement since then should be some indication of the limited extent to which the recent decline has restored appropriate valuations.