Hussman: Fed Action Won’t Boost Stocks

The problem with the comparisons John makes is that all of his "price/peak earnings" periods are not equal.  A valuation approach that completely omits interest rates leaves out the biggest asset allocation comparison faced by both managers and individuals.  Here’s the story, then I’ll elaborate.

Link: Hussman: Fed Action Won’t Boost Stocks.

Excerpt from John Hussman’s latest weekly essay: …attention has turned to the prospect that the Fed has finished, or is just about to finish, its tightening cycle. Isn’t that alone a great reason for bullishness here? …If you …

John is addressing one of the biggest valuation problems with the "peak earnings" concept.  This approach helps people get past the apparently high PE’s when earnings have been artificially depressed by a recession.

Unfortunately, his method ignores interest rates.  In a couple of the low PE examples he gives, like 1974 and 1982, stocks should have a low PE since interest rates were in double digits.  Just ask yourself: Would take an 8% return from stocks if bonds had a rate of 12%?  What if the bonds were 4%?

Experts may disagree about how to incorporate interest rates into analysis, but there should be no debate about whether to do so.