John Hussman runs a mutual fund (Hussman Strategic Growth) that I own. He's an Economist by training and he's proven to be a very good fund manager. The best thing about John is that he publishes a weekly market commentary that explains his current take on the market and the economy as a whole.
In the last 18 months he's been pretty cautious due to high equity valuations. That said, his weekly columns are always quick to point out that his observations are not predictions and he's very good about disclosing the futility of short-term market forecasts.
Not anymore (emphasis added by me)...
In short, the financial markets are at a critical point. It's possible that investors will somehow adopt a fresh willingness to speculate, but my impression is that in the weeks ahead, investors will be forced to recognize that recession risk has tipped. That's not to say that this realization will produce one-way market movements. Seasonal factors tend to buoy the market a few trading days before holidays and a few days around the turn of each month, and as I noted last week, oversold conditions lend themselves to “periodic short squeezes and spectacular but short-lived rebounds” (which we observed on Wednesday before quickly eroding). So we will almost certainly observe advances driven by investors frantic to “buy the dip” and “catch the rebound.” Overall, however, the return/risk profile on both stocks and the economy as a whole appear increasingly lopsided toward bad outcomes.
As I emphasized last week, my intent here is not to encourage investors to depart from carefully considered investment strategies. The real issue is that investors tend to overestimate their ability to stick with large (often inappropriate) exposures to equities during significant market downturns. I hope to encourage investors to carefully consider their ability to withstand a standard, run-of-the-mill 30% bear market loss (which has historically occurred once every 5 years or so) without deviating from their investment plan. Investors who can't believe that that sort of decline is, in fact, standard and run-of-the-mill are probably already in trouble because they haven't bothered to look at the data. None of this requires that we forecast or necessarily expect such a decline. But investors emphatically should not rule out such a decline in considering their investment exposure.