The further stock prices soar and give you a nosebleed, the more investors worry about a bubble.
But are such concerns justified? Some say no. Here’s a chart from UBS strategist Jonathan Golub, who tried to refute comparisons to the dot-com bubble in a client note earlier this month. The chart shows the stark difference in 10-year Treasury yields then and now, which can be a driver of stock market performance, especially for growth stocks.
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Others are more pessimistic, including John Hussman, president of Hussman Investment Trust, who predicted the stock market crashes of 2000 and 2008.
In a June 23 note, Hussman shared several charts detailing how the current market (at least by these standards) rivals some of the most extreme bubbles in history.
The first chart shows Hussman’s favorite valuation metric, the ratio of total nonfinancial market capitalization to total nonfinancial value added. This ratio is hovering near its two highest levels, in 2021 and 1929, and well above its levels in 2000 and 2008.
Hussman Fund
Hussman likes the index for its ability to predict long-term market returns, and current levels suggest negative absolute annualized returns for the S&P 500 over the next 12 years, and a -9.8% annualized return to risk-free 10-year Treasury bonds over the same period.
The second chart shows that while the share of New York Stock Exchange-listed stocks hitting one-year highs and bearish investors was below 30%, the S&P 500 has hit a five-year high just four times since 1990, according to Investor Intelligence data.
In addition to now, this combination has only occurred in 2000, 2019, and 2022.
Hussman Fund
And third, Hussman shared a chart showing that risk levels for the S&P 500 increase when taking into account valuations and something called “market insides.” Market insides is essentially an analysis of the performance of individual stocks to identify the level of market breadth and understand investor appetite for risk taking.
The risk level is now as high as it was in 2018 and 2000.
Hussman Fund
All of this paints a dire picture for the stock market, especially in the long term, Hussman said, but he also warned that a turnaround could be on the horizon.
“While market internal quality is deteriorating rapidly, the potential for further upside from these levels is minimal absent a complete change,” Hussman said. “In contrast, current valuation extremes suggest risk of a 50-70% or so downside for the S&P 500 by the end of the cycle.”
Hussman’s track record and his views in context
Of course, these views are well outside the market consensus. Top strategists at Wall Street’s biggest banks have been raising their price targets for the S&P 500 this year as the market continues to hit new highs, with most expecting the index to stay above 5,000 through the end of 2024.
Advances in AI, a strong labor market, and subdued inflation have made it harder to bet against the market, changing the minds of former bears such as Morgan Stanley’s Mike Wilson and Piper Sandler’s Michael Kantrowitz.
But there are still naysayers, with JPMorgan’s Marko Kolanovic predicting the S&P 500 could fall to 4,200, while a more extreme prediction from Jeremy Grantham is in the low 3,000s.
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 so stellar: His Strategic Growth fund has fallen about 53% since December 2010 and is down 11% in the past 12 months. By comparison, the S&P 500 is up about 26% over the past year.
The evidence of weakness that Hussman finds continues to mount, and his predictions of major sell-offs over the past few years are beginning to prove accurate in 2022. Sure, there is still potential for profits to be made in this new bull market, but at what point will the risk of a bigger crash become intolerable?
That’s a question investors will have to answer for themselves, and one that Hussman will continue to explore in the meantime.
