- John Hussman — the outspoken investor and former professor who’s been predicting a stock crash — says traders shouldn’t be fooled by the equity market’s big ongoing rebound.
- Hussman explains why he remains bearish on the market in the long term, and breaks down why stocks are still wildly overvalued, even after the December meltdown.
As stocks continue to rip higher following their Christmas-week meltdown, it would be easy to sit back and assume the worst is over.
After all, we’ve already recovered 14% from the 20-year low reached on Dec. 24 — a level that brought the S&P 500 within a hair of a bear market. To hear optimists tell it, the market shook out some negative drivers and is now free to resume its climb higher at more reasonable valuations.
But John Hussman is not particularly known for his optimism — at least not since stocks reached what he views as eye-bleeding valuations. And he contends that the coast is far from clear.
Hussman — the former economics professor and current president of the Hussman Investment Trust — notes that despite the close brush with a bear market, the stock market is still far too expensive to be considered attractive.
That’s reflected in the chart below, which shows stocks are still less than 10% below what he describes as the “steepest speculative extreme in history.”
And while the valuation argument is his core point, Hussman is also intensely focused on what he calls “market internals,” which are a series of indicators that take the overall pulse of the equity landscape.
Hussman has long argued that those internals are pointing in an overwhelmingly negative direction. And while he acknowledges they briefly flashed positive after the December meltdown, he says they’re now back in their long-running negative territory.
“Aside from the likelihood of a knee-jerk market spike on any variant of the word ‘deal,’ we continue to be in a trap-door situation with respect to market risk,” Hussman said, referring to possible trade-war progress.
He continued: “Though we did take the edge off of our negative outlook to allow for a scorching relief rally, my present view is that the overall function of that relief rally has been served.”
So where do we go from here? If Hussman is to be believed, the market could plummet roughly 55% from current levels. That would bring the S&P 500 to 1,192, which is the level he says would represent a “fairly run-of-the-mill-cycle completion.”
Hussman’s track record
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 has continued to grind mostly higher, he’s persisted with his calls, undeterred.
But before you dismiss Hussman as a wonky perma-bear, consider his track record, which he breaks down in his latest blog post. Here are the arguments he lays out:
- 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
In the end, the more evidence Hussman unearths around the stock market’s unsustainable conditions, the more worried investors should get. Sure, there may still be returns to be realized in this market cycle, but at what point does the mounting risk of a crash become too unbearable?
That’s a question investors will have to answer themselves. And one Hussman will clearly keep exploring in the interim.