The president of Hussman Investment Trust, John Hussman, is sure the bear market we are currently experiencing is “not over by a long shot.”
The S&P 500 is down 17% from its peak, which occurred 15 months ago, on the first day of 2022. Hussman, who correctly predicted the stock market catastrophes of 2000 and 2008, asserts that the numbers do not lie.
Hussman’s figures concern stock values, specifically in relation to yields on risk-free Treasury bonds.
“The simplest thing that can be said about current financial market and banking conditions is this: the unwinding of this Fed-induced, yield-seeking speculative bubble is proceeding as one would expect, and it’s not over by a longshot,” Hussman said in commentary titled “Edge of the Edge” delivered on March 19, 2023.
The S&P 500 is currently expected to produce negative returns over the next 12 years, according to Hussman’s preferred valuation metric, total market cap of non-financial firms to total revenue of non-financial stocks.
During the past few years, this valuation metric has been high, but a crucial factor has changed: yields on 10-year Treasury bonds have skyrocketed. Investors can now guarantee risk-free returns of 3.37% each year for the ensuing ten years. That percentage was less than 1% just a few years ago.
Hussman thinks stock valuations and prices will correct to lower levels in the months and years ahead because traditionally, stock market investors have wanted to be compensated with superior returns than risk-free assets (a concept known as the equity risk premium).
He goes to say that the estimated market loss of 26% would necessary to match the yield of 10-year Treasury bonds.
Hussman said. “Finally, a market loss of -58%, to the 1650 level on the S&P 500, would presently be required to restore historically run-of-the-mill expected returns of 10% annually.”
Those decline scenarios may seem extreme, but it is noteworthy to look at how the S&P 500 price action has developed over the past century following previous bubbles.
Market mood is another important factor in Hussman’s equation. Investors remain scared of the market, per his unique metric. High valuations combined with unfavorable investor expectations are a formula for disaster, according to Hussman.
“Since ragged, divergent internals are typically an indication of risk-aversion among investors, we view the combination of extreme valuations and poor market internals as a ‘trap door’ situation,” he said.
“For now, market conditions are not only unfavorable but increasingly fragile. Given that the most extreme market losses emerge when risk-aversion meets an inadequate risk-premium, suffice it to say that I chose the title of this comment intentionally,” he added.
In recent weeks, a number of Wall Street analysts have also issued warnings over the low equity-risk premium.
Nonetheless, there is strong debate regarding how equities will react in the coming months with some analysts sees the S&P 500 bottoming between 3,000-3,300.
Hussman’s hypothetical scenarios can be found in calls made by so-called “perma-bears,” such Jeremy Grantham. Recently, Grantham predicted that the S&P 500 may drop by 50%. He correctly predicted the 2000 and 2008 crashes, just as Hussman.
Since the start of the year, things have gotten trickier for investors. Fears of a recession have increased as a result of tight monetary policy beginning to show itself in the form of bank failures. Stocks may experience the kind of loss Wilson is projecting, or worse, if a recession does materialize. The job market is still strong as of right now, but only time will tell how well it withstands the lingering effects of interest rate increases.
For those who are unaware, Hussman has frequently made news by projecting a stock market collapse of more than 60% and a decade of negative equities returns. And he kept making apocalyptic predictions while the stock market continued to trend mainly upward.
Sure, it is easy to believe Hussman is always on the bearish side, but here are a few of the statements he has made in the past that give him creditability –
In March 2000, he predicted tech stocks would plunge 83%, the tech-heavy Nasdaq 100 index lost – get this, exactly 83% from 2000 to 2002.
Also in 2000 he stayed bearish with this one – the S&P 500 would see negative total returns over the next ten years. It did.
April of 2007, Hussman said the S&P 500 could lose 40% – it lost 55%. Then came the collapse.
Hussman’s recent results, though, have not exactly been outstanding. His Strategic Growth Fund has gained 4.8% over the past year, while it has lost around 44% since December 2010. In contrast, the S&P 500 has down 12.8% during the past 12 months.
Hussman has uncovered a growing body of material that is bearish, and his predictions for a significant sell-off during the past few years have so far come true. Certainly, there can still be gains from the most recent lows, but when does the growing threat of a more serious crash become intolerable? Investors will have to choose the solution for themselves, although Hussman will undoubtedly continue to do his research.
