There’s never been a worse time to be a conventional portfolio manager.
Well, maybe back in the deepest, darkest throes of the Great Depression that crushed the US economy way back in 1929. But not for the past 90-or-so years.
At least that’s what John Hussman thinks. The former economics professor and current president of the Hussman Investment Trust has crunched the numbers and found that the future looks historically bleak for investors who aim for a traditionally diversified mix of holdings.
His methodology looks at a portfolio with 60% invested in the S&P 500, 30% in Treasury bonds, and 10% in Treasury bills — and it’s designed to assess the expected total return over a forward 12-year horizon.
Hussman finds that at the stock market’s all-time peak in September, this mix of investments was set to produce total returns of just 0.48% over that 12-year period. As you can see below — as signified by the blue line — that’s the lowest since the Great Depression era of 1929.
Even though bond yields recently climbed and US stocks took a 10% hit, Hussman notes that the expected return climbed to just 1.29%, still Great Depression lows. This fact shows just how far stretched the market is right now — and reinforces the degree to which it must drop to make future returns more appealing.
To that end, Hussman calculates that, in order to achieve a 10% expected return with that portfolio mix, the S&P 500 would have to plummet by roughly 60%. That would be a brutal reckoning that would rank among the biggest and most catastrophic in history.
“Notice that the completion of every market cycle has served to restore normal prospective market returns, which is routinely accomplished by sharp losses in security prices,” Hussman wrote