Despite the sell-off over the last year-plus, valuations remain near dot-com bubble levels.There are two major driving forces of stock-market returns, according toUnfortunately, both are unfavorable at the moment, said Hussman, the president of the Hussman Investment Trust who called the 2000 and 2008 market crashes, in a recent commentary.
"All that is required for a stock market collapse is for investors to demand historically run-of-the-mill prospective returns from stocks, rather than continuing to price stocks at speculative valuations that represented the equivalent of crying 'uncle' in the face zero interest rates." As of now, the indicator shows valuations hovering around the same levels seen during the height of the dot-com bubble over two decades ago, even after last year's losses.As for investors sentiment — or what Hussman calls"market internals" — he uses a proprietary measure of the uniformity of investor behavior. Right now, he said, the indicator shows investors are not inclined to speculate, which in the past has not meant good news for stocks.
"The flat portions in the chart below are periods when, like last year, market internals were persistently unfavorable, leading us to prefer T-bills or hedged equity to unhedged market risk. You'll see the same tendency during the 2000-2002 and 2007-2009 collapses," Hussman said."We can't rule out 'whipsaws,' and we don't expect internals to 'catch' short-term market fluctuations.