John Hussman makes makes some great points. Here’s one of them.
While it’s true that the market established even deeper valuation troughs in 1974 and 1982 (near 7 times prior peak earnings, compared with the current multiple of about 11), it is important to remember that long-term Treasury yields were 8% in 1974, and 14% in 1982, compared with about 4% at present. While I’ve frequently argued that stock and bond yields are not related in anything near the 1-to-1 manner that the “Fed Model” suggests, it is already clear that a long-term investment in stocks here is likely to substantially outperform a long-term investment in Treasury securities over time. Even with very little adjustment for risk, U.S. stocks are likely to provide stronger long-term returns than the yields available on most corporate bonds as well.
That’s right. P/E’s may not be as low as they were at the market lows of 1974 and 1982, but interest rates were much higher then. So stocks had to get to ridiculously low valuations to compete with the high returns that could be realized from investing in Treasuries. That’s not the case today.
And on why nobody cares that Warren Buffett is bullish:
The most interesting thing about that op-ed piece wasn’t Buffett’s opinion about stock valuations. He’s absolutely right, in my view. Rather, it was fascinating how quick many investors were to dismiss Buffett’s advice, saying either that he didn’t understand how bad the economy was going to get, that he preferred to “get in early,” or that he was “talking his book” and trying to bid up the value of his own investments.
Also:
The rush to dismiss Buffett’s advice underscores the extreme level of bearishness among investors here. According to Investors Intelligence, just 22.4% of investment advisors are presently bullish. This matches the lowest extremes we’ve seen in decades. Extreme negativity of investors has generally been a useful contrary indicator of stock market prospects. That doesn’t ensure that stocks have registered their final lows, but it contributes to a set of historically favorable conditions here.
The best time to buy is during periods of extreme negativity. Some things never change. Read the whole thing.
