- John Hussman – the outspoken investor and former professor who has already predicted a pre-emptive strike – is currently predicting “zero or negative returns for more than a decade.”
- To support his dissertation, Hussman relies on valuations, sentiments and international markets, all of which point to a difficult outlook ahead.
- Hussman says current valuations imply a two-thirds, or 66%, implication in equities.
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With unemployment at 10.2%, second-quarter annulled GDP down 33%, and a global pandemic that apparently cannot be curbed, it is no wonder why many investors are skeptical about an S&P 500 trade within spray distance of a new full half time.
John Hussman – the outspoken investor and former professor who predicted a stock short – is honestly confusing. He has a three-part list handy to explain why.
“Here and now, market conditions have 1) historically extreme valuations, 2) unfavorable spread in our measures of international markets, and 3) unusually ‘overvalued, overbought, overbullish’ circumstances,” he penned in a recent customer note.
He added: “That combination keeps us in a hard-negative market outlook, but it’s also a flexible outlook.”
The pleasing nature of Hussman’s perspective can be attributed to its measure of international markets. It is a proprietary gauge that he lends to distinguish between the amount of speculation and risk aversion present in the market. And if investors exhibit widespread behavior – as they do today – he will not step in for an oncoming train. He will proceed cautiously.
However, not all aspects of Hussman’s point of view are attractive – especially when it comes to ratings. Indeed, by its measure, investors are currently struggling with “the most extreme valuations in history, which continue with a two-thirds loss in the S&P 500 implying over the completion of this cycle.”
To demonstrate the growing gap between historical ratings (green line) and current market levels (blue line), Hussman provided the following chart. The red line represents his interpretation of a sustainable market level. Undoubtedly, there is a big gap between measures.
Hussman
For Hussman, current rising market levels spell bad news for future returns – and not just in the short term.
“On Wednesday, July 29, the US financial markets made quiet history as our projection of 12-year nominal total returns for a conventional passive portfolio mix (60% S&P 500, 30% Treasury bonds, 10% Treasury bills) fell to -0.45%, the lowest level in history, “he said.
Below, Hussman provided his proprietary estimated 12-year total return on a conventional portfolio (60% equities, 30% bonds, 10% cash – blue line) compared to the actual next 12-year return for that portfolio (red line) to help to demonstrate his thinking. His projections have never been lower.
Hussman
“While the yields of 10-year Treasury bonds are at just 0.6%, we estimate that the 12-year average annual total return of the S&P 500 with that level will fall by about 2%, producing a very long, but probably interesting journey to zero as a negative return for more than a decade, “he said.
Hussman’s track record
For the uninitiated, Hussman has repeatedly made headlines by predicting a share increase of more than 60% and predicting a full decade of negative return on the stock. And because the stock market has mostly remained higher, he is persistent with his talks.
But before you dismiss Hussman as a wonky perma-bear, consider his track record, which he broke in his last blog post. Here are the arguments he explains:
- Predicted in March 2000 that tech stocks would fall 83%, the tech-heavy Nasdaq 100 index lost an ‘incredibly attractive’ 83% in the period from 2000 to 2002.
- Predicted in 2000 that the S&P 500 would likely see negative overall returns in the next decade, which it did.
- Predicted in April 2007 that the S&P 500 could lose 40%, it lost 55% in the subsequent column from 2007 to 2009.
However, Hussman’s recent returns have been less than theft. Its Strategic Growth Fund has returned just 2.4% in the last year, placing it in the 47th percentile relative to peers, according to Bloomberg data. And it actually declined 1.4% on a three-year basis, putting it in the 23rd percentile.
Yet the amount of bearish evidence discovered by Hussman remains. 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 need to answer themselves – and one that Hussman, meanwhile, remains clearly exploring.
