Guru Grades

John Hussman on Market Valuation and Market Action (Last Updated 8/12/08)

We evaluate here the commentary of John P. Hussman, Ph.D. regarding the stock market via his archived articles since September 2003. John Hussman is President of Hussman Investment Trust. He postulates that: "The key elements in evaluating securities and market conditions are 'valuations' and 'market action.' Each unique combination of these conditions results in a distinct Market Climate, with its own profile of expected return and risk." His investment approach is to "align our investment position with the prevailing Market Climate and shift that position when sufficient evidence of a Climate shift emerges." The chart below extracts highlights from his commentary and shows the performance of the S&P 500 index over the 5, 21, 63 and 254 trading days after the publication date for each item. Red plus (minus) signs to the right of specific items indicate those the market subsequently proves right (wrong). We conclude that:

• Because John Hussman writes weekly, we base our judgments on the correctness of his comments based mostly on near-term (one week and one month) subsequent market behavior.
• To minimize forecast overlap, we sample his first market climate assessment for each month, augmented by those assessments in which he identifies changes in market climate.
• He has consistently characterized stocks as overvalued in all commentaries. He has identified changes in market climate based predominantly on "market action," which measures (via technical indicators) the willingness of investors/traders to take on risk. His "market action" assessments therefore key our evaluation of his accuracy.
• John Hussman's market discussions are highly nuanced. He is careful to note that he does not make market forecasts; rather, he identifies statistical market tendencies. In our un-nuanced judgment, he is right about 53% of the time with respect to subsequent market moves, which is somewhat above average. His forecast sample size is moderate, as is our confidence in this conclusion.

In summary, the accuracy rate of John Hussman's stock market characterizations is somewhat above average. His "valuation" measure has had no practical use. Confidence in this conclusion is moderate.

John Hussman’s "valuation" measure, stuck on "unusually overvalued" for the duration of his archive, provides no guidance regarding the performance of the stock market. Valuing financial assets requires context (for example, how many years of historical data are relevant). The predictive power of the valuation approach is an indication of the appropriateness of the context chosen. Admittedly, he does not expect the market to "snap to" his valuation view. Rather, as he acknowledges in his 9/1/03 article, "unusually overvalued" stocks can deliver "adequate returns between now and some narrow set of future dates." Apparently, though, "narrow" can be pretty wide. For example, the "overvalued" S&P 500 index advanced 51% during 9/03-9/07.

John Hussman's repeated assertions that his market climate assessments ("average outcomes") are not forecasts is an epistemologically challenged distinction without a difference in terms of investing/trading actions.

See Guru Grades for a snapshot of the accuracy of various experts in predicting the direction of the U.S. stock market, including links to evaluations of the commentaries of other individual market pundits and gurus.