Hussman: Stocks Aren't Cheap but Are 40 Percent Overvalued

Economist John Hussman says the S&P 500 remains about 40 percent above historical norms on the basis of normalized earnings.

"Think of it this way," Hussman writes in a note to investors. "Suppose your poodle is 40 percent overweight. Someone sells you a scale where every pound shown on the dial represents 1.4 pounds of actual weight."

When your poodle steps on that scale, the dial will report that your dog’s weight is ideal.

"That may be comforting if you don't like to face reality, but the truth is, you've still got one sick puppy," Hussman says.

Virtually every assessment that "stocks are cheap" is based on the ratio of the S&P 500 to year-ahead operating earnings estimates, and often comes with a comparison of the resulting "earnings yield" with the depressed 10-year Treasury yield, Hussman explains. (more)