- John Hussman, the outspoken investor and former professor who has been predicting a stock market crash, has recalibrated how he looks at his forecast.
- Recent market volatility resulting from rising trade-war fears has poured fuel on the fire for his latest bearish proclamation.
- Hussman not only sees stocks plummeting more than 60%, but he also issues the stark warning that there’s very little investors can do to avoid major pain.
After all, the former economics professor who is now president of the Hussman Investment Trust has made a name for himself by repeatedly predicting a stock market decline exceeding 60% and forecasting a full decade of negative equity returns — and yet here we sit just 9% from record highs, even after some bouts of heavy selling.
At this point, Hussman is in on the joke. On his Twitter biography, he refers to himself as a “realistic optimist often viewed as a prophet of doom.” It’s a tongue-in-cheek reference to his forecasts, which many view as outlandish but which he sees as a logical endpoint for markets.
But don’t confuse Hussman’s self-awareness with a lack of conviction. He’s still dead set on sweeping equity declines totaling more than 60% — a plunge he says will erase the excess total return of the S&P 500 index dating all the way back to October 1997.
That’s because rather than losing faith in his call, Hussman did some digging around as to why it hadn’t yet come true, and has recalibrated the conditions of his forecast. He now says two things have to happen: (1) valuations get historically extended, and (2) investor sentiment shifts into risk-off territory.
“When we examine market collapses across history, the common feature is that both investment merit and speculative merit are absent,” Hussman wrote in a recent blog post.
According to the chart below — not to mention every single piece of research written by Hussman over the past year and change — the first qualification has been more than met. In his mind, multiple measures of valuation have been hovering in a danger zone for far too long.
The second part is where it gets tricky. Hussman notes that his past forecasts have fallen victim to an unstoppable groundswell of risk-taking behavior, at least in the immediate term. He says investors, emboldened by global central-bank accommodation and a low-rate environment, continued diving into stocks, even amid myriad valuation warnings.
Now, however, Hussman sees traders switching to a more risk-off approach. It’s a view that’s being increasingly held by strategists across Wall Street, including at Bank of America Merrill Lynch, which said recently that declining risk thresholds could mean the end of the wildly popular buy-the-dip strategy. And it’s accompanied a glut of negative geopolitical headlines, most involving President Donald Trump’s escalation of trade tensions.
“We’re observing the very early effects of risk-aversion in a hypervalued market,” Hussman said. “Investment is about valuation. Speculation is about psychology. Both factors are unfavorable here.”
Perhaps even scarier than Hussman’s drastic forecast is his assertion that, at this point, investors are powerless to stop the oncoming freight train of bearishness.
For one, he argues that no matter what a trader does to defend against a reckoning, they’ll regret it. If the market continues to climb after they pare positions, they’ll wish they’d stood pat. If the market plunges after a portfolio rebalance, they’ll wish they’d sold out of more positions.
Secondly, and perhaps most nihilistic of all, is Hussman’s argument that it’s too late for anyone to do anything. No matter what happens, he says, someone will be on the wrong end of history.
“It’s impossible, in aggregate, for investors to get out, because every share of stock that’s been issued has to be held by someone until that share is retired,” Hussman said. “The only question is who holds the bag on the way down.”
Source: FS – All – Economy – News
The market's most outspoken bear sees recent turbulence fueling his forecast of a 60% stock drop — and says it's too late to get out