One market bear says stocks will plunge 67% after surging to 'breathtakingly extreme' valuations
- By an increasing number of measures, US equity valuations are at the highest on record.
- Investor and former professor John Hussman doesn't think this is a sustainable situation, and forecasts that stocks will lose two-thirds of their value from current levels.
- Hussman is an outspoken market pessimist who's sounded the alarm on equity valuations repeatedly in recent months.
- He argues that while psychological factors can keep valuations high in the near-term, the long-term forecast for the market will involve an unavoidable major selloff.
One of the stock market's most outspoken bears is at it again.
That would be John Hussman, the president of the Hussman Investment Trust and a former economics professor. He's been sounding the alarm on what he forecasts will be a catastrophic equity selloff for months now, and his warnings are only getting more forceful.
This time around, Hussman is calling for the benchmark S&P 500 to lose 67% of its current value. That would bring the index from roughly 2,862 down to 950, a truly eye-popping level considering the index's seemingly unstoppable streak of gains.
"I expect that the S&P 500 will lose approximately two-thirds of its value over the completion of this market cycle," Hussman wrote in a recent blog post.
His rationale for the selloff is one that he's cited with each subsequent forecast: stock prices have simply gotten too extended. And while Hussman has a war chest of valuation metrics he monitors, the one that just recently hit record highs is a measure of non-financial market capitalization, relative to corporate gross value-added (see below).
The market bloodbath that Hussman is forecasting will be so bad, in fact, that one of investors' favorite tactics - buying the dip - will be numb to its power.
"My impression is that the first leg down will be extremely steep, and that a subsequent bounce will encourage investors to believe the worst is over," he said. "Study market history. The trouble rarely ends until valuations have approached or breached their long-term norms."
Still, Hussman's forecasts must be absorbed with the ultimate caveat in mind - his doomsaying predictions have yet to come true, even though he's been making them for months.
His explanation for this is straightforward: he's referring to a longer-term cycle, and while the market has remained resilient in the short-term, it must eventually buckle.
Hussman argues that when sentiment and psychology - rather than fundamentals - are driving the market higher, prices can increase for some time, but the end result is always some sort of crash. And in the case of this most recent run up to record highs, he cites the Federal Reserve's easy monetary policy as having emboldened traders.
"Aside from an occasional bit of lip-service, followed by reassuring justifications, investors entirely dismiss the level of valuations when they have the speculative bit in their teeth," he wrote. "Recognizing that valuations matter profoundly over the long run, yet are nearly useless over the short run, is central to navigating complete market cycles."
But Hussman isn't one to offer such a pessimistic forecast without a solution. For those looking for protection, he recommends tail-risk hedges that kick in automatically as the market declines, rather than trades that require the completion of sell orders.
"I believe that it's essential to carry a significant safety net at present," he wrote. "Breathtaking valuations are followed by dismal consequences."