The comments below are an edited and abridged synopsis of an article by John Hussman

You know it’s a bubble when you have to edit the Y axis on all your charts because valuations have broken above every historical peak, and estimated future market returns have fallen beyond the lowest points in history.

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One thing about investing is that the more you pay for a given stream of future cash flows, the lower the long-term returns will be. It’s exactly when past returns are most glorious that future prospects are most dismal.

It’s also clear that if overvaluation alone was enough to drive prices lower, the market could never reach the sort of extreme hypervaluation we saw in 1929 and 2000, nor the dismal long-term prospects those valuations created.

So we have to distinguish between long-term returns, which are driven by valuations, and returns over shorter segments of the market cycle, which are driven by investor psychology.

When investors move toward speculation, they tend to be indiscriminate about it. Throughout history, the most reliable gauge of whether investors are inclined toward speculation or risk aversion is the uniformity of market internals across stocks, industries, sectors and security-types, including debt securities of varying creditworthiness.

The S&P500’s return during the 2007/2020 market cycle occurred during periods when measures of market internals were favourable, with T-bills outpacing the S&P500 with lower risk. One thing that made today’s bull market different from prior market cycles was that reliable (overvalued, overbought, overbullish) extremes did nothing to contain speculation amid zero interest rates. In 2017, we abandoned our willingness to pre-emptively adopt a bearish outlook in response to these syndromes if our measures of internals were still favourable.

But the market doesn’t always decline when internals are unfavourable. Rather, whatever gains the S&P500 earns in excess of T-bills when internals are unfavourable, even during the late stages of a bubble, are typically impermanent.

Up for discussion: yikes—the S&P500 will lose about two-thirds of its value over the completion of the current market cycle; below the surface; glamour stock FOMO; and a continuing incubation phase.

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