The S&P 500’s massive decade-long rally has provided no shortage of gurus, bloggers and media calling for anything from a pullback to an outright crash in U.S. equities. One of the go-to catalysts that doomsayers blame for the anticipated downdraft is “valuation.”

If there is one thing people love to chirp about, it’s valuation, and there has been no shortage of bandwidth used to tout how overvalued U.S. stocks are right now.

To be clear, we aren’t one of the many perma-bull U.S. equity cheerleaders who believe it’s always a good time to invest in the S&P (SPX). Rather, we are perma-agnostic, allowing the data and our Gravitational Framework to tell us when it’s time to be bullish, bearish or completely out of a given market.

The problem with this valuation argument is that equity markets don’t correct or experience significant drawdowns because of valuation. People don’t wake up one morning and suddenly decide that 26x earnings is too much to pay for the S&P 500.

Here, we pause to make a request of Warren Buffett disciples who make the annual pilgrimage to Omaha to kiss the ring, and spend their weekends sifting through company balance sheets looking for the diamond in the rough: please keep nasty emails and passive-aggressive tweets to yourself.

We are not implying that valuation, as a metric, isn’t useful as part of certain investment strategies. What we are saying, however, is that using valuation to decide when the stock market is ready for a correction is like using the Super Bowl to determine the stock market’s future direction.

Back in the 1970s, Leonard Koppett figured out that the Super Bowl winner could accurately predict the future direction of the S&P 500. If the AFC won, the S&P would lose ground over the next 12 months. If the NFC won, the S&P would gain in the following year.

At the time Koppett discovered this supposed “connection,” the Super Bowl had accurately predicted the S&P direction 100% of the time. As of last year, this predictor of S&P returns has been right 40 out of 50 years—an 80% success rate!

Clearly, the Super Bowl has no real connection to the S&P 500, and this is just a coincidence. Similarly, stock market valuation has no real connection to causing corrections—it can simply act as a downside accelerant once the correction begins for Fundamental Gravity reasons.

Paging Mr. Hussman

Enter John Hussman, aka “Captain Valuation,” who holds a Ph. D. and runs three mutual funds with over $350MM in assets under management. Hussman writes regular commentaries, all of which have “valuation” as their core theme. For years, he has been calling for the next stock market calamity:

The problem for Hussman is that the market is continually becoming even more “overvalued,” gaining an additional 156% and experiencing a maximum peak-to-trough drawdown of just 13.0% over the time horizon of the articles cited above. Hardly the stuff that market “crashes” are made of.

You may be saying to yourself, “But he has a Ph. D. and manages over $300MM, he must know what he’s talking about!” Well, keep reading.

Proof is in the pudding
Folks, Hussman’s flagship fund, Hussman Strategic Growth, (HSGFX) has lost money over the last one, three, five, ten, and fifteen years. We couldn’t make this up if we tried! This guy’s fund is dead last in his Morningstar category over every one of those time frames, with the exception of the last year. Over the last 12 months, he managed to make his way from the 100th percentile up to the 88th percentile when compared with other managers in his niche. Nice job, John!

We have absolutely no idea how this guy is even still in business, but the numbers don’t lie: “valuation” is not the foundation for consistently successful investing.

This calamity story is another reminder of why it’s critical to be data-dependent and process-driven in financial markets. Don’t fall into the trap of being scared into believing the world is ending tomorrow just because markets are “overvalued” by a bunch of metrics that no one discusses until they reach “historically extreme” levels.

The Bottom Line

There will be many road signs for the next recession (or even crisis) before the real wealth destruction occurs. Those road signs will also be far more meaningful than all valuation metrics combined.

Follow our principles of focusing on now and watching the slopes and extremes of economic and financial market data, and you’ll be well-prepared and able to pivot your portfolio when the time comes.

Please email us at ClientServices@WhaleyGlobalResearch.com if you’d like to receive an email alert when we get long gold and to participate in a an eight-week free trial of our research offering, which consists of three weekly reports: Gravitational Edge, The 358, and The Weekender.