- John Hussman sees negative returns for the S&P 500 over the next decade.
- Hussman says stocks remain about as overvalued as they were during the biggest bubbles in history.
- Hussman called the 2000 and 2008 market crashes.
Over the long-term, stock performance is a question of simple math, says John Hussman.
Higher valuations mean lower returns, and vice versa. Right now, valuations remain at some of their highest levels in history, the president of the Hussman Investment Trust who called the 2000 and 2008 market crashes, said in a recent note.
“At present, our most reliable equity market valuation measures remain more extreme than at any point in history prior to July 2020, with the exception of a few months directly surrounding the 1929 peak, and two weeks in April 1930,” Hussman said.
Those valuations measures include his proprietary ratio of total market cap of non-financial stocks to revenue of non-financial stocks, as well as his margin-adjusted price-to-earnings ratio.
Here’s the latter, from a February Hussman note. The S&P 500 is up 2.2% since then.
As for short-term market performance, investor sentiment plays more of a role, Hussman said. Unfortunately, that’s not looking great right now either.
According to Hussman’s proprietary measure of “market internals,” which are a reflection of investor behavior and sentiment, investors remain bearish. That sets up stocks for a “trap door,” steep drop scenario, he said.
“Our primary gauge of market internals remains unfavorable, based on uniformity and divergence of market action across thousands of individual stocks, industries, sectors, and security-types, including debt securities of varying creditworthiness,” he said. “A market collapse, at its core, is really nothing but risk-aversion meeting a market that is not priced for risk.”
He added: “Those conditions may change, but for now we continue to estimate the likelihood of negative 10-12 year S&P 500 total returns, with the prospect of interim losses on the order of -60%.”
While Hussman acknowledges the boldness of his call, he said to look at history. Stocks are more overvalued relative to Treasury bonds than anytime since the late 1920 and early 1930s. Eventually, investors expect a greater return for the extra risk they’re taking, and valuations fall.
The chart below shows how far the S&P 500 would have to fall to provide either a 10% return or 2% premium over Treasury bonds. When stocks have become this overvalued relative to bonds in the past, stocks have usually followed with commensurate declines.
Hussman also took down the notion that a Federal Reserve pivot to a more dovish stance — which the market expects to happen in the second half of this year — will support a renewed bull market. Some see the Fed pivoting due to declining inflation, while others see it being forced to pivot because of a recession.
“A decade of quantitative easing has led investors to imagine that Fed easing reliably supports the stock market, and that it is Fed easing that ends market collapses. The fact is that the Fed eased persistently and aggressively through both the 2000-2002 and 2007-2009 collapses,” he said. “Historically, the worst market outcomes have typically occurred when the Fed is easing in an environment that combines economic weakness with risk-aversion among investors. If one believes that a Fed “pivot” is something that investors should hope for, one is not paying attention.”
Hussman’s track record — and his views in context
Hussman is not alone in his call for significant market declines.
GMO Founder Jeremy Grantham, who also called the 2000 and 2008 market crashes, recently said that the S&P 500 could fall another 50% from current levels.
Some top Wall Street equity strategists are also warning of big declines, though not as severe as what Hussman and Grantham are calling for. Morgan Stanley’s Mike Wilson says a collapse in earnings this year will drive the S&P 500 down to a range between 3,000-3,300 before recovering to 3,900 before the end of the year. With the index near 4,169, a drop to 3,000 represents 28% downside.
Piper Sandler’s top strategist Michael Kantrowitz also sees a recession ahead and certain areas of the market beginning to price this in. He sees the S&P 500 finishing 2023 at around 3,150, he told YouTube channel Wealthion.
Bank of America strategists Michael Hartnett and Savita Subramanian have also said in client notes that stocks are due for a rough ride ahead amid a recession, and that the S&P 500 could fall to 3,000.
And JPMorgan’s Dubravko Lakos-Bujas said this week that stocks are setting up for a “bearish outcome” as a recession is not yet priced in.
Bulls are still clinging to hope that a soft-landing scenario for the economy and stocks is possible, however. So far, the labor market remains intact while inflation has fallen to 5% year-over-year. The Fed itself predicts that unemployment will rise to 4.6% by the end of the year, however, up from its current level of 3.7%. Its recession probability model is also at 57%, higher than it was in 2001 and 2008.
For the uninitiated, Hussman has repeatedly made headlines by predicting a stock-market decline exceeding 60% and forecasting a full decade of negative equity returns. And as the stock market continued to grind mostly higher, he persisted with his doomsday calls.
But before you dismiss Hussman as a wonky perma-bear, consider again his track record. Here are the arguments he’s laid out:
- He predicted in March 2000 that tech stocks would plunge 83%, then the tech-heavy Nasdaq 100 index lost an “improbably precise” 83% during a period from 2000 to 2002.
- Predicted in 2000 that the S&P 500 would likely see negative total returns over the following 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, Hussman’s recent returns have been less than stellar. His Strategic Growth Fund is down about 45% since December 2010, though it’s only down 2.5% in the last 12 months. The S&P 500, by comparison, is up 0.8% over the past year.
The amount of bearish evidence being unearthed by Hussman continues to mount, and his calls over the last couple of years for a substantial sell-off are proving accurate so far. Sure, there may still be returns to be realized from recent lows, but at what point does the mounting risk of a larger crash become too unbearable?
That’s a question investors will have to answer themselves — and one that Hussman will clearly keep exploring in the interim.