In early 2007 I started telling everyone I knew that they should go into cash. At that juncture I was about 9 months too early and a few percentage points short of the actual October 2007 top. Yet, people who ended up following my advice were not only able to avoid a massive 2007-2009 drop, preserving their cash, they were able to buy stocks at dirt cheap prices at 2009 bottom.
John Hussman says we are now witnessing the same kind of equity valuation bubble that preceded the last two stock drops of 50 percent or more. Hussman: Dismal Outlook for Stocks — Air Pocket, Free Fall or Crash
“My own view is that stocks are vulnerable to the risk of deep losses over the completion of the present cycle not unlike those it experienced in the two most recent cycles, and are likely to post total returns from present valuations of only about 1.4% annually over the coming decade.”
I couldn’t agree more. Think about it in the following fashion. Given today’s valuation levels, even if we are lucky enough to avoid a crash/decline, the stock market is unlikely to go much higher. In fact, any further upside would simply add to bubble valuation levels, leading to an ultimately crash scenario. In other words, Mr.Market has already borrowed returns from 5-10 years into the future in order to yield today’s stock prices.
Invest accordingly.
