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Hussman: Stock Market’s Risk/Reward Profile Worst in 100 Years

By Dan Weil   |   Tuesday, 18 Sep 2012 07:53 AM

The return/risk profile of the Standard & Poor’s 500 Index has dropped to its lowest point of the last 100 years, according to mutual fund manager John Hussman.

That certainly points to an overvalued, overbullish market, he writes in his weekly commentary.

“All of this should make bells go off for anyone familiar with market history. Of all the investment adages that are being embraced as reasons to accept market risk, somehow the phrase ‘buy low, sell high’ is conspicuously absent.”

Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation

And that will almost certainly mean trouble for investors, Hussman says.

“In all of the present ebullience about quantitative easing with no ex-ante amount, . . . the market conditions we observe at present have been consistently associated with negative outcomes throughout history.”

To be sure, nothing new has happened, Hussman says.

“This is an extreme data point, but there has been no abrupt change; no sudden event; no major catalyst. We are no more defensive today than we were a week ago, because conditions have been in the most negative 0.5 percent of the data for months.”

One could argue that the Federal Reserve’s massive easing campaign is simply blowing a bubble in risk assets that will burst with grave consequences for the financial system.

And investors are embracing risk to attain income.

"The search for yield . . . may grow more intense," Rebecca Patterson, chief investment officer of Bessemer Trust, tells The Wall Street Journal.

Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation

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