- John Hussman is sounding the alarm again, warning of a 65-70% stock market crash.
- Hussman said in a recent commentary that he believes the Federal Reserve’s monetary policy is pushing valuations to unsustainable levels and will drive the S&P 500 to a -3.6% return over the next 12 years.
- He predicted that the total return of the S&P 500 will likely lag behind the Treasurys for much of the 12-year period.
- Visit the Business Insider homepage for more stories.
Before a market sell-off, John Hussman’s right leg begins to slap unconsciously.
Right now, he says, it’s tapping.
“I thought maybe it was pumpkin pie, but after further analysis, it’s because current market conditions are so familiar,” Hussman said in his December market commentary.
For Hussman, there is a clear and straightforward sequence of events that will eventually occur that will lead the market into a downward spiral – a spiral of 65-70% from current levels.
There’s the Federal Reserve’s creation of a zero interest rate environment and the corresponding narrative that investors are forced to find returns in riskier assets like stocks – or in the 2000s, commodities. like mortgage backed securities.
Then there’s the direct effect this has on stock valuations, which have soared on rising demand.
“The idea that ‘there is no alternative’ but to speculate has again saturated the minds of market participants, driving S&P 500 valuations to levels that now exceed all historical extremes, including including 1929 and 2000, although we completely exclude the economic losses due to the COVID-19 pandemic, ”Hussman said.
Hussman, who is chairman of the Hussman Investment Trust, acknowledges that the Fed is using low rates with the intention of stimulating the economy, but he said they were too unaware of the more powerful impact this has on stock valuations. and in turn – at least ultimately. – Investors.
But it’s not just the low interest rate environment that is pushing investors towards stocks that Hussman sees as detrimental to investors. It’s also the fact that the Fed is too often around to save the day the market collapses, only adding and prolonging the problem.
“The perpetual speculation of Wall Street rests on the confidence that every withdrawal from the market will be met by another stick-save of the Federal Reserve, “Hussman said, the emphasis being his.” Yet all these stick-saves by the Federal Reserve only postpone a financial collapse by amplifying its eventual size. “
A world of no return
Hussman illustrated the dire state of valuations with a chart showing the margin-adjusted price-to-earnings ratio levels at an all-time high, well above 40.
He said the indicator “correlates better with subsequent actual market returns than almost any other metric we’ve tested or introduced.”
Given this extreme territory for evaluations, Hussman projects what amounts to a sort of world of no return.
Over the next 12 years, he estimates the S&P 500 will drop to -3.6%. For portfolios with an allocation of 60% to S&P 500, 30% to T-bills and 10% to T-bills, he predicts a return of -1.7%.
“Stock prices didn’t just factor in a rally. They are already beyond what they were before the pandemicHussman said.
“Indeed, we currently estimate that the average annual nominal total return of the S&P 500 is likely to delay Treasury yields by -4.6% over the next 12 years. So much for the concept of “equity prime risk.”
To demonstrate why his outlook is so dire for the next decade and why he thinks a stock market crash is due, Hussman came up with another chart.
It shows the yield estimates for Treasuries, Treasuries, Corporate Bonds, Utilities and the S&P 500 for the next 10 years at points just before various market declines: February 2020, March 2009, October 2007, October 2002, March 2000 and August 1982.
Next to these pre-fall peaks are the current estimates for the next 10 years. All of the above assets are currently at or near the low of potential returns from these dates.
That said, Hussman recommends investors increase their cash allocation and wait for a better buying opportunity.
This buying opportunity will come in the form of a 65-70% pullback, he said.
He again backed his point with a chart above the S&P 500 valuation and selling levels.
“You will notice that extreme valuations are not always immediately associated with drawdowns. That’s why you see these white spaces between the blue valuation lines and the red drawdowns, which occur during times when a bubble is developing.” , did he declare.
“Unfortunately, levies usually come with revenge. Currently, we expect the current cycle to be completed with a market loss of around 65-70%.”
He added: “Yes, I know. A 65-70% levy sounds insane and utterly absurd, but the revulsion at the idea is largely due to pervasive speculative psychology, not historical evidence, cash flow. or fundamentals. “
A deviation from consensus
Hussman’s views differ dramatically from those of some of Wall Street’s top analysts.
Mike Wilson of Morgan Stanley, as an example, said that even if the valuations of large-cap growth stocks at the top of the S&P 500 are too high to lend themselves to strong near-term appreciation, the market will then be pushed. up 8%. year by soaring value and cyclical prices as the economy recovers.
Wilson predicted the last two market sales with great accuracy, and told Business Insider that while the metrics he used to make those predictions “are still signs of exhaustion,” he doesn’t even call for a decrease of 10%.
As another example, Goldman Sachs said the S&P 500 will rise 20% next year.
And JPMorgan has predicted that the market will grow by 26% in 2021.
Hussman’s record
Above, we noted that Hussman’s right leg is currently banging – his self-described visceral indicator of an upcoming sell-off. But to be fair, it’s not clear if his leg ever stopped slapping.
For the uninitiated, Hussman has repeatedly made headlines predicting a stock market decline exceeding 60% and predicting a full decade of negative stock returns. And as the stock market continued to climb, it persisted with its doomsday calls.
But before you dismiss Hussman as a wobbly permanent bear, consider his background, which he broke down in a recent blog post. Here are the arguments he sets out:
- Predicted in March 2000 that tech stocks would drop 83%, the tech-hungry Nasdaq 100 Index lost 83% “to improbable accuracy” over a period from 2000 to 2002.
- Predicted in 2000 that the S&P 500 would likely experience negative total returns over the next decade, which it did.
- Predicted in April 2007 that the S&P 500 could lose 40%, then it lost 55% in the subsequent collapse from 2007 to 2009.
However, recent Hussman returns have been less than stellar. Its strategic growth fund has been down about 50% since December 2010, although it rose more than 11% last year.
Still, the amount of bearish evidence unearthed by Hussman continues to increase. Of course, there may still be returns to be made in this market cycle, but at what point does the growing risk of a crash become too unbearable?
That’s a question investors will have to answer for themselves – and one that Hussman will clearly continue to explore in the meantime.
- John Hussman is sounding the alarm again, warning of a 65-70% stock market crash.
- Hussman said in a recent commentary that he believes the Federal Reserve’s monetary policy is pushing valuations to unsustainable levels and will drive the S&P 500 to a -3.6% return over the next 12 years.
- He predicted that the total return of the S&P 500 will likely lag behind the Treasurys for much of the 12-year period.
- Visit the Business Insider homepage for more stories.
Before a market sell-off, John Hussman’s right leg begins to slap unconsciously.
Right now, he says, it’s tapping.
“I thought maybe it was pumpkin pie, but after further analysis, it’s because current market conditions are so familiar,” Hussman said in his December market commentary.
For Hussman, there is a clear and straightforward sequence of events that will eventually occur that will lead the market into a downward spiral – a spiral of 65-70% from current levels.
There’s the Federal Reserve’s creation of a zero interest rate environment and the corresponding narrative that investors are forced to find returns in riskier assets like stocks – or in the 2000s, commodities. like mortgage backed securities.
Then there’s the direct effect this has on stock valuations, which have soared on rising demand.
“The idea that ‘there is no alternative’ but to speculate has again saturated the minds of market participants, driving S&P 500 valuations to levels that now exceed all historical extremes, including including 1929 and 2000, although we completely exclude the economic losses due to the COVID-19 pandemic, ”Hussman said.
Hussman, who is chairman of the Hussman Investment Trust, acknowledges that the Fed is using low rates with the intention of stimulating the economy, but he said they were too unaware of the more powerful impact this has on stock valuations. and in turn – at least ultimately. – Investors.
But it’s not just the low interest rate environment that is pushing investors towards stocks that Hussman sees as detrimental to investors. It’s also the fact that the Fed is too often around to save the day the market collapses, only adding and prolonging the problem.
“The perpetual speculation of Wall Street rests on the confidence that every withdrawal from the market will be met by another stick-save of the Federal Reserve, “Hussman said, the emphasis being his.” Yet all these stick-saves by the Federal Reserve only postpone a financial collapse by amplifying its eventual size. “
A world of no return
Hussman illustrated the dire state of valuations with a chart showing the margin-adjusted price-to-earnings ratio levels at an all-time high, well above 40.
He said the indicator “correlates better with subsequent actual market returns than almost any other metric we’ve tested or introduced.”
Given this extreme territory for evaluations, Hussman projects what amounts to a sort of world of no return.
Over the next 12 years, he estimates the S&P 500 will drop to -3.6%. For portfolios with an allocation of 60% to S&P 500, 30% to T-bills and 10% to T-bills, he predicts a return of -1.7%.
“Stock prices didn’t just factor in a rally. They are already beyond what they were before the pandemicHussman said.
“Indeed, we currently estimate that the average annual nominal total return of the S&P 500 is likely to delay Treasury yields by -4.6% over the next 12 years. So much for the concept of “equity prime risk.”
To demonstrate why his outlook is so dire for the next decade and why he thinks a stock market crash is due, Hussman came up with another chart.
It shows the yield estimates for Treasuries, Treasuries, Corporate Bonds, Utilities and the S&P 500 for the next 10 years at points just before various market declines: February 2020, March 2009, October 2007, October 2002, March 2000 and August 1982.
Next to these pre-fall peaks are the current estimates for the next 10 years. All of the above assets are currently at or near the low of potential returns from these dates.
That said, Hussman recommends investors increase their cash allocation and wait for a better buying opportunity.
This buying opportunity will come in the form of a 65-70% pullback, he said.
He again backed his point with a chart above the S&P 500 valuation and selling levels.
“You will notice that extreme valuations are not always immediately associated with drawdowns. That’s why you see these white spaces between the blue valuation lines and the red drawdowns, which occur during times when a bubble is developing.” , did he declare.
“Unfortunately, levies usually come with revenge. Currently, we expect the current cycle to be completed with a market loss of around 65-70%.”
He added: “Yes, I know. A 65-70% levy sounds insane and utterly absurd, but the revulsion at the idea is largely due to pervasive speculative psychology, not historical evidence, cash flow. or fundamentals. “
A deviation from consensus
Hussman’s views differ dramatically from those of some of Wall Street’s top analysts.
Mike Wilson of Morgan Stanley, as an example, said that even if the valuations of large-cap growth stocks at the top of the S&P 500 are too high to lend themselves to strong near-term appreciation, the market will then be pushed. up 8%. year by soaring value and cyclical prices as the economy recovers.
Wilson predicted the last two market sales with great accuracy, and told Business Insider that while the metrics he used to make those predictions “are still signs of exhaustion,” he doesn’t even call for a decrease of 10%.
As another example, Goldman Sachs said the S&P 500 will rise 20% next year.
And JPMorgan has predicted that the market will grow by 26% in 2021.
Hussman’s record
Above, we noted that Hussman’s right leg is currently banging – his self-described visceral indicator of an upcoming sell-off. But to be fair, it’s not clear if his leg ever stopped slapping.
For the uninitiated, Hussman has repeatedly made headlines predicting a stock market decline exceeding 60% and predicting a full decade of negative stock returns. And as the stock market continued to climb, it persisted with its doomsday calls.
But before you dismiss Hussman as a wobbly permanent bear, consider his background, which he broke down in a recent blog post. Here are the arguments he sets out:
- Predicted in March 2000 that tech stocks would drop 83%, the tech-hungry Nasdaq 100 Index lost 83% “to improbable accuracy” over a period from 2000 to 2002.
- Predicted in 2000 that the S&P 500 would likely experience negative total returns over the next decade, which it did.
- Predicted in April 2007 that the S&P 500 could lose 40%, then it lost 55% in the subsequent collapse from 2007 to 2009.
However, recent Hussman returns have been less than stellar. Its strategic growth fund has been down about 50% since December 2010, although it rose more than 11% last year.
Still, the amount of bearish evidence unearthed by Hussman continues to increase. Of course, there may still be returns to be made in this market cycle, but at what point does the growing risk of a crash become too unbearable?
That’s a question investors will have to answer for themselves – and one that Hussman will clearly continue to explore in the meantime.