- John Hussman is again warning that stock market valuations are “extreme.”
- Hussman highlighted the breadth of overvaluation in stocks.
- He said the S&P 500 is facing 12 years of negative returns.
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Psychology plays a big role in how financial markets behave. Sometimes that can be a very bad thing.
Right now, when stocks are sitting just under all-time-highs, is one of those times, according to John Hussman, the president of the Hussman Investment Trust and a notorious market bear who called the 2000 and 2008 stock market crashes.
Hussman warned in his most recent commentary that investors are forgetting – or don’t know altogether – the role that equilibrium plays in markets, and are mistakenly speculating further on securities that have already seen massive appreciation on the prospect of future growth.
This behavior has pushed stock valuations up to “extreme” levels, putting them in a precarious position, Hussman said. One catalyst that could bring about a pullback, he added, is an underperformance of the economic recovery relative to investors’ expectations.
“It’s quite possible that the mental image in anticipation of a post-pandemic recovery may be more pleasant than the actual recovery itself,” he said in the June 13 commentary. “In that event, the glowing optimism currently built into record valuation extremes could be followed by quite a bit of disappointment.”
He added: “This is not a market that is priced for the smallest shred of disappointment.”
To illustrate how overextended he believes markets are, Hussman shared a chart showing average price-to-sales ratios for each valuation decile of the S&P 500. Each decile’s ratio is at its all-time high.
“Each line is best compared with its own history. Presently, every one of these deciles is at the most extreme level in history (unlike the 2000 peak, when there was far more dispersion across valuations),” Hussman wrote. “This is breathtaking, and I don’t expect it to end well.”
Hussman said he believes the S&P 500 is staring down 12 years of negative returns from current levels. He cited the predictive power that valuations have on future returns. Valuations on June 11, Hussman pointed out, were the highest ever (shown at the bottom right of the chart).
Hussman’s track record – and his views in context
Hussman isn’t alone in sounding alarm bells about extreme valuations. He is joined by fellow big-name investors like Jeremy Grantham, Jim Rogers, Jeffrey Gundlach, Mark Yusko, and others, many of whom are calling for a sizable crash.
But beyond the normal bearish crowd, Hussman’s dismal outlook on future returns is, to a degree, a fairly mainstream view on Wall Street.
Bank of America, for example, said earlier this year that the S&P 500 is likely to return an average of 2% over the next decade given how high current valuations are. Yields on risk-free 10-year Treasury notes, by comparison, are currently at about 1.5%.
It is difficult to predict what stocks will do in the months ahead. Upside surprises on economic growth and earnings could push them higher, while the opposite could drag them down. Inflation, if it gets too hot, could also put an end to stocks’ party if Treasury yields rise significantly as a result. The Federal Reserve tapering bond buying or hiking rates could also present a roadblock.
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 his track record, which he broke down in a recent blog post. Here are the arguments he lays 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 44.5% since December 2010, though it’s risen more than 12% in the past year (the S&P 500 has gained 35% since last June).
Still, 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.
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