- John Hussman, the outspoken investor and former professor who has been predicting a stock market crash, highlights a change he says has occurred in investor psychology since the February correction.
- He argues that this "subtle shift" is a glaring red flag for the stock market at current valuations, and leaves it more vulnerable than ever to a meltdown.
But that doesn't mean they're ready to act on that information.
For evidence of that, consider that the 9-1/2-year bull market is now the longest on record— a milestone that's come amid a string of new record highs for stocks. In many cases, investors have been willing to ignore the flashing warning signs in favor of continued strong returns.
And as that's happened, valuation metrics have climbed into even more rarefied air, endlessly frustrating market traditionalists who see a disaster brewing.
John Hussman— a former economics professor who's now the president of the Hussman Investment Trust — falls firmly into that camp.
He's stood by and watched as a seemingly endless supply of buying power has pushed valuations to eye-popping levels that exceed the fervor seen around the 2000 dotcom peak, as well as the Great Recession of 1929.
The chart below shows five valuation metrics monitored by Hussman that bear this out. In his mind, these measures — which are listed in the chart's legend — have been highly correlated with future S&P 500 returns throughout history.
"Last week, the stock market recorded the most offensive valuation extreme in history," Hussman wrote in a blog post from September 4. "I am aware of no plausible conditions under which current extremes are likely to work out well for investors."
A recent shift that's changed the game
If you've followed Hussman's work at all in recent months, you likely know he's been making such bearish proclamations for quite some time.
It's been a trying time for him as he waits for the market reckoning he's predicted to occur. Over that period, Hussman's become quite self-aware, referring to himself as a "realistic optimist often viewed as a prophet of doom" in his Twitter bio.
He's even gone as far as to diagnose why exactly his long-forecast market crash hasn't transpired. At this point, he readily admits that he misjudged the willingness of return-hungry investors to ignore red flags, particularly as they pertain to valuation.
But a recent development has emboldened Hussman to once again reiterate his bearish forecast — one that calls for the US equity market to lose roughly two-thirds of its current value. He describes it as a "subtle shift of investor psychology."
It all traces back to measures of market internals that Hussman says reflect risk appetite. He argues that — following the 11% correction that rocked US stocks back in February — the minds of investors became infected. They became more risk-averse, whether they intended to or not, which market behavior started to reflect.
Hussman notes that those internals have only worsened in the period since. He highlights the narrowing of stock market leadership, the increased idiosyncracy of individual stock trading, and weakness in corporate bonds.
And before you call Hussman an unabashed doomsayer, note that he readily admits he'd consider a constructive — or even bullish — stance on the market if these internals turned around.
Unfortunately, at this point, he says they've been heading in the wrong direction for far too long.
"While we've observed nearly perpetual 'overvalued, overbought, overbullish' syndromes for years during the recent half-cycle, the current extreme is combined with unfavorable market internals," said Hussman. "Which indicates a subtle shift of investor psychology toward risk-aversion, and opens up a trap door below the market."
Hussman's track record
For the uninitiated, Hussman has repeatedly made headlines by predicting a stock-market decline exceeding 60% and forecasting a full decade of negative equity returns. And as the stock market has continued its seemingly unstoppable grind higher, he's persisted with his calls, undeterred.
But before you dismiss Hussman as a wonky perma-bear, consider his track record, which he breaks down in his latest blog post. Here are the arguments he lays out:
- Predicted in March 2000 that tech stocks would plunge 83%, then the tech-heavy Nasdaq 100 index lost an "improbably precise" 83% during a period from 2000 to 2002
- Predicted in 2000 that the S&P 500 would likely see negative total returns over the following decade, which it did
- Predicted in April 2007 that the S&P 500 could lose 40%, then it lost 55% in the subsequent collapse between 2007 and 2009
In the end, the more evidence Hussman unearths around the stock market's unsustainable conditions, the more worried investors should get. Sure, there may still be returns to be realized in this current market cycle, but at what point does the mounting risk of a crash become too unbearable?
That's a question investors will have to answer themselves. And one that Hussman will clearly keep exploring in the interim.
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