- John Hussman said the confluence of warning signals suggests a major market correction is on the way.
- “There’s nothing magical about these syndromes, but when dozens of them occur simultaneously, it makes us pay attention.”
- Despite his warning, Wall Street remains bullish and expects the index to surpass 5,000 this year.
Perpetual bear John Hussman wrote on Monday that rumbling market alarm suggests the S&P 500 has finally hit a speculative peak, and he says the next big crash is likely.
In a new memo, the well-known bear doubled down on his view that the benchmark index will fall 50% to 70% this cycle — a view the president of Hussman Investment Trust has repeatedly signaled, based on a number of warning signs in the markets his firm tracks.
For example, stock prices are hitting new lows faster than they can make new highs, and market negative leadership is at a five-year high.
“I believe this indicator, taken in isolation, is a useful but insufficient way to gauge market conditions,” Hussman said. “But when combined with the broader speculative warning, it’s the ‘final straw’ I mentioned a few weeks ago.”
As of Friday, these “warning syndromes,” tracked in daily data, suddenly eclipsed tallies seen in 2000, 2007, late 2018 and early 2020, all years linked to crashes.
“There is nothing magical about these syndromes, but the simultaneous occurrence of dozens of them does make us pay attention,” he wrote.
While these measures alone are enough to highlight short-term dangers, adverse conditions within the market should also be a wake-up call, while the current extreme levels of market valuations pose longer-term risks as well.
According to Hussman’s most reliable measure, the ratio of nonfinancial market capitalization to total corporate value added, market valuation is now higher than it was in 1929, when the Dow Jones Industrial Average soared 89% from its peak to its trough.
“I don’t think it’s generally possible to pinpoint market peaks and troughs in real time, but history does show unusual occurrences where there are a sudden flood of conditions that suggest a peak in speculation or a capitulation of risk aversion,” he said.
That likely means further gains for the S&P will be minimal, but the correction Hussman predicts won’t necessarily happen anytime soon, he said. Meanwhile, most of Wall Street remains bullish on the market, expecting the index to stay above 5,000 for the rest of the year.
Hussman’s track record
For the uninitiated, Hussman said: Stock prices fall Over 60% in 10 years Negative stock returnsAnd as the stock market largely rose, he continued to preach doomsday wisdom.
But before dismissing Hussman as a perpetual bear, consider his track record. Here’s the argument he makes:
- He predicted that tech stocks would plummet 83 percent in March 2000, and the tech-heavy Nasdaq 100 index then fell 83 percent between 2000 and 2002 with “unbelievable accuracy.”
- In 2000, he predicted that the S&P 500 would likely experience negative total returns over the next decade, and that’s exactly what happened.
- He predicted in April 2007 that the S&P 500 could fall 40%, and then it fell 55% in the 2007-2009 crash.
But Hussman’s recent returns haven’t been stellar: His Strategic Growth fund lost more than 50% between December 2010 and April 2010, while the S&P 500 has risen substantially in that same period.
