John Hussman says stocks need to fall another 51% to reach an acceptable equity risk premium.Other Wall Street strategists have warned in recent weeks of a historically-poor ERP.
The numbers in question for Hussman have to do with stock valuations, particularly relative to yields on risk-free Treasury bonds. "We presently estimate that a market loss of -26%, to the 2,900 level on the S&P 500, would presently be required simply to restore expected S&P 500 total returns to 3.4%, the present yield of 10-year Treasury bonds. A market loss of -51%, to the 1900 level on the S&P 500, would presently be required to restore a historically normal 5% expected return premium above Treasury bonds ," Hussman said.
Another key part of the equation for Hussman is market sentiment. According to his proprietary measure, investors are still wary of the market. A combination of high valuations and a poor outlook from investors is a recipe for disaster, Hussman said.
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