With both the Dow Jones and the S&P 500 recently surpassing all-time highs, many stock market observers have begun warning investors about the potential risk of a bubble in stocks, bonds or the credit market. However, not everyone sees the market heading this way.
Yahoo Finance recently caught up with John Hussman, a fund manager and stock market analyst credited with predicting the most recent U.S. recession, at the 2013 Wine Country Conference, a charity event benefiting those who suffer from Lou Gehrig's disease. Hussman is also the president and principal shareholder of Hussman Strategic Advisors, an advisory firm that manages Hussman Funds.
At the event, Hussman told the source that he believes the next bubble will be seen across the entire corporate sector due to a weakness in business profits. Hussman says that since corporate earnings are near 11 percent of gross domestic product (GDP), 70 percent above average historical levels, marginal improvements in the federal deficit and in household savings could lead to corporate losses of 12 percent or more annualized over the next three to four years.
This in turn has created what Hussman says is a stock market that is "overvalued, overbought and overbullish," or one where stocks can rise and fall without a clear correlation to any one indicator. At SmartStops, we offer a comprehensive solution for this type of market, providing investors with access to a Risk Based Position Sizing Calculator and Risk Barometer Index they can use to assess their risk exposure and set adaptive exit strategies that limit losses.
To offset his funds' risk, Hussman says his firm is investing in "somewhat more defensive stocks," those that avoid financials, materials, cyclicals and home builders. Hussman went on to note that this action is necessary in order for his funds to focus on long-term strategies while managing risk.
"In our world is what we sometimes call the champ-to-chump cycle," he told Yahoo. "Over the full cycle, people who care about risk will go through that fluctuation."
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