John Hussman, the legendary investor who successfully predicted the 2000 and 2008 stock market crashes, recently warned that investors are ignoring stretched valuations and he expects the stock market to plunge 65-70%. Hussman believes investors are seriously underestimating how extreme valuations have become and have failed to establish reasonable expectations about the future. In fact, these people are swarming in and pushing valuations to current heights while naively believing that the market’s trajectory in the future will continue like this. Hussman points out that this situation is highly consistent with the eve of the 1929 and 2000 crashes, and the US stock market over the next decade is likely doomed to only provide negative returns.
Hussman’s valuation model shows alarming overvaluation
One of Hussman’s main valuation metrics is the ratio of total market cap to gross value added or total profits, which he says still has the strongest correlation with actual subsequent market returns compared to any other metrics tested or introduced. The current level exceeds that of the 2000 and 2008 bubble periods. Hussman emphasizes valuations because of their predictive power – his model shows the S&P 500 is poised for -6% annualized returns over the next 12 years based on current valuations.
Massive projected losses in line with historical plunges
Hussman projects 65-70% losses ahead, in line with his predictions in 2000 and 2008. In March 2000, he predicted an 83% plunge in tech stocks, which materialized between 2000-2002 as the Nasdaq 100 fell 83%. In April 2007, he predicted a 40% drop in the S&P 500, which ended up falling 55% during the 2007-2009 crash.
Risk of economic stagnation may trigger downturn
What factors could trigger a downturn as the economy finally gets running? Hussman says one possibility is tepid economic data. This is because massive federal spending will decelerate while consumer spending hasn’t picked up. Hussman believes investors may also be underestimating the risk of major economic friction and deficits over coming quarters.
The legendary investor John Hussman, who correctly predicted the 2000 and 2008 crashes, warns the stock market faces 65-70% losses amid dangerously stretched valuations.