Tuesday, 18 September 2012

Stock market return/risk prospect at worst point in history

John Hussman, who has been negative on the stock market for several months, has become even more negative. From his latest commentary:

As of Friday, our estimates of prospective return/risk for the S&P 500 have dropped to the single lowest point we’ve observed in a century of data. There is no way to view this as something other than a warning...

And last week's Fed move will not help.

We continue to view QE as being of no real economic benefit, and though it has clearly affected financial markets, QE has typically boosted the stock market by little more than the amount it has lost over the prior 6 month period. That’s another way of saying that I doubt the Fed’s actions will be of much durable effect here at all...

Doug Kass also has little faith in QE3. From his latest commentary at Real Money:

I am skeptical that QE3 (i.e., open-ended purchases of mortgage-backed securities) will mollify the modified liquidity trap we are currently in, and I am skeptical that the labor market and/or real economy will feel any benefits from the recent Fed announcement. In fact, I see the unintended consequences of higher inflation and rising intermediate- to longer-term interest rates as, at the very least, diluting what the Fed is trying to accomplish.

Kass thinks the key issue may be declining corporate profits.

I believe the market's lifeblood and its ultimate fair market valuation importantly lie with the direction of U.S. corporate profits. As I mentioned previously, third quarter 2012 will represent the first drop in S&P earnings in three years... The bottom-up consensus for 2013 S&P profit growth is for gains of at least 10%, while the top-down estimates are at about 5% growth. But ... an outlier expectation of a decline in corporate profits of as much as 5% is more likely for next year.

In contrast, David Kotok thinks QE is positive for stocks. However, the impact on bonds is less clear. From his latest article:

... US treasury bond yields are expected to fall. But global sellers may have other things in mind. They now suspect the US dollar will weaken and therefore they want to exit their holdings. When they do that, the yields on those instruments will rise and the prices fall if the global sellers sell more in a given period than the Fed is buying...

Stocks ... have the ability to adjust to the inflationary outcomes that this extraordinary Fed policy can deliver. American stocks can state their foreign earnings in US dollar terms. Therefore a weakening US dollar means they will report higher earnings. Thus stocks get a double kick from this policy. They benefit from the weak dollar earnings translation and they benefit from the Fed duration switch.


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