John Hussman: The Key Question
“The key question – in view of extreme credit market strains in Europe, and accelerating economic deterioration in the U.S. – is why the S&P 500 continues to trade within a few percent of its April bull market high. The answer is simple: investors are scared to death of missing the widely anticipated market advance that they expect to follow a widely anticipated third round of quantitative easing. Good economic news may be a relief for investors, but bad economic news in this context is just as much of a relief because it brings forward the anticipated delivery date of the sugar. The follow-up question, however, is that if more QE is widely anticipated, and a market advance is widely anticipated to result, isn’t that the precise definition of an event that is already priced into the market?”
I thought John Hussman captured this sentiment very eloquently. As I try to understand/rationalize stock price moves, it seems to me that it is not greed that has recently driven prices higher but expectations of QE. Perhaps prices move per the “Keynesian beauty contest” wherein investors bid up prices in anticipation of everyone else doing the same. In the short term, this seems like it would be a self-fulfilling cycle. At this point, I don’t know the degree to which equity holders truly believe they are getting good value in buying equities at current levels. If investors are skeptical about the value of what they own, this could portend a pullback at some point.