Investors Have Few Attractive Investment Opportunities at Present

 

“[I]nvestors face a perfect storm ? risky assets priced to achieve dismal long-term returns (except in comparison to equally dismal alternatives), coupled with the risk of an oncoming recession,” according to John Hussman (“John Hussman: Nearly every asset class set for ‘miserably low’ returns,” InvestmentNews).

The dismal alternatives include 10-year U.S. Treasury notes yielding 2%; 30-year U.S. Treasury bonds yielding 3%; the Dow Jones Corporate Bond Index yielding 3.5%; the S&P 500 index, which, according to Hussman, is priced to return 4.5% per annum over the next 10 years; and higher yielding utilities priced to return 5.5% annually for the next 10 years.

Prices of risky assets like stocks are too high to support higher projected returns because Federal Reserve Chairman “Ben Bernanke has done his job well, given that he believes his job is to drive investors into higher-risk assets by starving them of yield on safer investments,” according to Hussman.

He quotes PIMCO’s Mohammed El Erian as saying: “The big exposure to Americans is the general exposure to the equity market. You cannot be a good house in a bad neighborhood, that’s just a fact. The equity market is the house, and the global economy is the neighborhood. So if the global economy takes a leg down, the equity market is going to take a leg down too.”

The global neighborhood is bad and seems to be getting worse. Hussman says that one year Greek debt trades at 38% of face value when everyone supposedly agrees that it will only be written down by 50%. Even a 50% writedown would result in a Greek debt to GDP ratio of more than 100%, and the 50% figure might not hold up, according to Hussman.

Hussman’s advice to investors and their advisors appears to be: wait for a significant price correction (which may come suddenly) so that risks are appropriately priced before exposing money to risky assets. “We emphatically don’t need to wait for the world to solve its problems before being willing to accept risk. What we do need is for those risk assets to be more appropriately priced in view of those problems. We’re not there by any means, but a significant change in the market’s return/risk profile could come quickly.”

As for risky assets investors already hold, continue to hold only “the amount they would be willing to hold through the duration of a significant downturn, without abandoning them in the interim.”

Page Perry is an Atlanta-based law firm with over 150 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 45 occasions. For further information, please contact us.