"In my view, by aggressively intervening in the financial markets, at valuation levels that are still nowhere near run-of-the-mill historical norms, the Federal Reserve has performed an amygdalotomy on the investing public," he said in a recentHe continued: "The Fed has encouraged a maladaptive confidence that risk does not exist. This overconfidence of investors is itself a threat to their survival.
To Hussman, unabashed reliance on the Fed is misguided. By his methodology, investor sentiment and psychology is key — and if those turn negative, all the stimulus in the world won't be enough to prop up stocks. Below is Hussman's proprietary measure of market internals — a gauge he uses to discern sentiment — juxtaposed against the S&P 500's cumulative total return . As of today, internals remain negative."Investors should be careful to avoid the misconception that easy money always supports the market," he said. "The fact is that market outcomes are conditional on whether investor psychology is inclined toward speculation or toward risk aversion.
He added: "Easy money only 'works' to support prices if investor psychology is inclined toward speculation." Hussman provids the following chart to show how monetary policy reacts when market internals are favorable and unfavorable. The conclusion he reaches is that accommodative monetary policy isn't going to make much of a difference in the market if internals remain negative, as demonstrated by the orange line.
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