- John Hussman believes stocks are poised for a decade and more of abysmal returns.
- He said current valuations will rob future performance.
- He is joined by several Wall Street strategists who warn of a coming decline.
At the start of his last commentary on the market, John Hussman included an excerpt.
“This is the longest period of virtually uninterrupted rise in stock prices in our history. The rise has been faster than ever and its speculative appeal has swayed more of the public than ever before,” we read. “The psychological illusion on which it was based, while not essentially new, has been stronger and more widespread than has ever been the case in this country in the past.”
One could confuse this with a description of the current market environment without batting an eyelid. But it’s actually the November 2, 1929 issue of The Business Week magazine, published in the midst of the biggest stock market crash in history.
Hussman, the chairman of the Hussman Investment Trust that called the dot-com bubble more than 20 years ago, believes history is repeating itself. He believes investors once again believe that stock valuations will stay high forever. And he thinks they are making a big mistake once again.
Valuations are widely extended beyond standards, by numerous measures. Hussman thinks they will eventually return to their standards, through the law of balance.
In the chart below, Hussman illustrates how well stocks currently are above valuation standards, which he measures by market cap to gross value added and margin-adjusted price-to-earnings ratios.
Because Hussman believes valuations will return to normal eventually, he believes stock returns in the years to come will be terrible. He said the actions would go “nowhere in an interesting way.” Examples of what happens are shown in the table above. See: 1962-1974 and 1997-2008.
“By the time you look at where the starting valuations are, you already know that in all likelihood the prospects for acceptable stock returns are screwed up,” he wrote.
Hussman isn’t the only one criticizing valuations. In a note earlier this month, Savita Subramanian, chief U.S. equities strategist at Bank of America, said the bank’s model expects 0% annualized returns for the S&P 500 over the course of the next decade given today’s valuations, excluding dividends.
Instead of mediocre returns and massive sales, one possibility is that GDP growth and inflation will bring valuations down to appropriate levels. But over the next 13 years, to get back to valuation standards, GDP is expected to grow by 10% per year or inflation is expected to rise by more than 8% per year – both are highly, highly unlikely.
Hussman also criticized the Federal Reserve and its role in supporting markets through accommodative monetary policy. He believes investors and the Fed itself have bought into the narrative that central bank support is backing stocks out of necessity through its quantitative easing. But that tale will eventually end, he said, causing chaos.
“The Fed has become almost entirely dependent on a narrative that its actions ‘support’ financial markets,” he wrote. “When that narrative breaks down – because it is actually a narrative, not a mechanistic relationship – all hell will break loose, as it did in 2000-2002 and 2007-2009 despite the ‘persistent easing by the Fed. “
Hussman’s background – and his opinions in context
There is a camp on Wall Street who also thinks stocks are too tight at the moment.
Stifel’s chief U.S. equities strategist Barry Bannister said this week he expects a 10% correction this quarter, triggered by monetary tightening around the world. He also pointed out the absurdity of the 97% gain recorded by the S&P 500 over the past 18 months.
“Excluding dividends, the market price doubles every 10 years,” Bannister told Insider.
Bannister’s year-end S&P 500 price target of 4,000 matches that of top strategists at Morgan Stanley, Citigroup and BTIG. The 4,000 mark would represent a decline of almost 12% from current levels of around 4,545.
Other Wall Street strategists believe stocks have a bit of wiggle room. The most optimistic of them are Chris Harvey of Wells Fargo at 4,825 and Brian Belski of the Bank of Montreal at 4,800. Goldman Sachs, JPMorgan and Oppenheimer all have their goals at 4,700.
But beyond this year, it’s hard to say where stocks will go, with uncertainty over transient inflation and how the Fed will manage monetary policy, potentially under a new president. The state of the economy is also uncertain, with job growth slowing, inflation rising and industrial production slowing, but spending remains strong.
For the uninitiated, Hussman has repeatedly made headlines predicting a stock market decline of more than 60% and predicting a full decade of negative stock returns. And as the stock market continued to rise mainly, it persisted in its doomsday calls.
But before you think of Hussman as a wobbly permanent bear, think about his background, which he described in a recent blog post. Here are the arguments he puts forward:
- He predicted in March 2000 that tech stocks would plunge 83%, then the tech-rich Nasdaq 100 index lost 83% “improbably accurate” over a period from 2000 to 2002.
- Predicted in 2000 that the S&P 500 would likely experience negative total returns over the next decade, which it did.
- Predicted in April 2007 that the S&P 500 could lose 40%, it then lost 55% in the collapse that followed from 2007 to 2009.
However, recent Hussman returns have been less than stellar. Its strategic growth fund is down about 48% since December 2010, although it has increased by 2.2% in the last year. Still, the S&P 500 has returned over 31% over the same period.
The amount of bearish evidence uncovered by Hussman continues to increase. Of course, there may still be returns to be made in this market cycle, but at what point does the growing risk of a crash become too unbearable?
That’s a question investors will have to answer for themselves – and one that Hussman will clearly continue to explore in the meantime.