- John Hussman is warning that stocks will end down 60-70% from January highs.
- He said stock valuations and investor sentiment remain poor.
- Hussman also called for 10-12 years of negative returns from January’s highs.
Discussions on Wall Street about a stock-market bottom are underway after five brutal months to start 2022. Since January 3, the S&P 500 is down about 12%.
But to John Hussman, stocks aren’t even close to hitting the floor. That’s because valuations remain far too high, historically speaking.
“Despite the year-to-date decline in the S&P 500, the most reliable valuation measures we monitor remain at levels never observed in market history prior to August 2020,” Hussman, the president of the Hussman Investment Trust who called the 2000 and 2008 stock market crashes, said in a recent commentary.
Hussman uses the
of nonfinancial stocks-to-gross-value-added (total revenue) ratio as his premier measure for stock market valuations because he says it’s proven to be the most reliable indicator for subsequent returns. But by a host of valuation measures, Hussman said the market remains even more overvalued than at the height of the dot-com bubble, if looked at by how many times above a measure’s historical norm it currently is. (1.0 is the each measure’s historical norm.)
But high valuations on their own don’t signal trouble, Hussman said. Rather, it’s a period of high valuations and poor investor sentiment.
“It’s useful to think about valuations and market internals jointly, rather than separately,” he said. “The market can continue to advance even in the face of extreme valuations, provided that investors have a speculative bit in their teeth (which we gauge through the uniformity of market internals). In contrast, extreme valuations can matter suddenly, and with a vengeance, once investor psychology shifts toward risk-aversion.”
Hussman uses a proprietary model to measure market internals, and said they are currently “ragged and divergent.”
He also highlighted that the S&P 500 has moved below its 200-day moving average, and showed charts comparing bubble peaks in 2000, 2007, and now.
“Bull markets train investors to think in terms of single, V-shaped selloffs followed by advances to fresh highs. In bear markets, it’s best to quickly abandon that thinking, preferably until market internals improve. Once market internals shift to a uniformly favorable condition, the 200-day average typically begins to act as support rather than resistance.”
Hussman said stocks would end up down 60-70% from January’s highs, assuming that was the market’s peak. He also warned that the market faces 10-12 years of negative returns, on average, from January’s highs.
Hussman’s track record — and his views in context
Hussman’s call for negative returns over the next decade given how high valuations have been isn’t unique. Bank of America’s Head of Equity and Quantitative Strategy Savita Subramanian said as much in 2021. GMO’s Jeremy Grantham, Stifel’s Barry Bannister, and RIA Advisors’ Lance Roberts are among others who have also made this call.
But Hussman’s call for a 60-70% decline has less company, apart from Grantham and some perma-bear types.
There are calls, though, for the current sell-off to continue to a lesser degree. CFRA’s Sam Stovall said recently that the S&P 500 could fall to 3,450, or about a 17% further drawdown. Glenmede’s Mike Reynolds said the index would hit fair value at around 3,585. And Morgan Stanley’s Mike Wilson has said 3,400 is a possibility given the risk to earnings as the
Still, the average Wall Street strategist remains fairly bullish for the rest of 2022, with a median S&P 500 price target of about 4,800 (roughly 15% upside).
Investors have absorbed a lot of bad news in 2022, from a Fed turning hawkish to four-decade-high inflation to global supply chains being continually disrupted. It’s still unclear how much these inputs will improve or worsen heading into the second half of the year.
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 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 43% since December 2010, though it’s up about 1.6% in the last 12 months. The S&P 500, by comparison, is down 0.4% over the past year.
The amount of bearish evidence being unearthed by Hussman continues to mount. 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 that Hussman will clearly keep exploring in the interim.