A notorious market bear who called the 2000 and 2008 crashes dispels the notion that a Fed

Investors are giddy that the cuts could ensure a soft-landing for the US economy, and keep both the labor market as well as consumer spending strong enough to help the bull market expansion continue.

But John Hussman, the president of the Hussman Investment Trust who called the 2000 and 2008 market crashes, is skeptical that a Fed pivot can provide the kind of juice for stocks that investors are expecting.

Two things stand in the way of continued outperformance for the S&P 500: stock valuations are near their most elevated levels in history, and investor sentiment is actually not as strong as it needs to be to continue lifting stocks.

When it comes to determining the market’s valuation, Hussman prefers his measure of market cap to gross value-added for nonfinancial stocks, which he says most accurately forecasts long-term market returns. Hussman’s measure has been cited by fellow bear and investing legend Jeremy Grantham in recent interviews.

In the chart below, it’s apparent that current market cap to gross value-added levels are above those seen in both 1929 and 2000, when stocks were at the precipice of two of the biggest declines in market history.

Hussman Funds

Other common valuation measures, including the Shiller cyclically-adjusted price-to-earnings (CAPE) ratio, show stocks are historically elevated


When it comes to investor sentiment, which he refers to as “market internals,” Hussman also uses his own measure. It basically looks at how wide participation in a market rally is among individual stocks — also known as market breadth. Hussman says this offers a window into the degree in which investors are inclined to speculate.

The chart below, from a November note, shows the measure represented by the red line. When it’s flat, internals are unfavorable, and stocks tend to underperform. This is easy to see in the 2000 and 2008 crashes.

Hussman Funds

Hussman says investors often associate Fed pivots with years when the Fed cut rates while valuations and internals were favorable. But when the Fed pivots when these elements are not in a good spot, Hussman believes it does nothing to boost stocks.

“The yearning affection that investors hold for Fed pivots is quietly driven by the fact that nearly all the pivots occurred when the S&P 500 already stood at historically normal or depressed levels of valuation,” Hussman said.

He continued: “In contrast, the horrible market outcomes following the 1973, 2007 and 2001 pivots were associated with the combination of elevated or extreme valuations without a sustained improvement in internals. The ‘intermediate’ case was 2019, when the market responded well despite steep valuations, because market internals had measurably improved.”

With valuations high and investor sentiment poor, stocks are due to suffer negative returns over the next 12 years, Hussman said. In fact, given where valuations stand today, and especially considering how high risk-free Treasury yields are at the moment, history shows stocks could drop dramatically, he said.

“At present, we estimate that a decline to the 1650 level on the S&P 500 (a 65% loss) would be needed to restore historically run-of-the-mill S&P 500 expected returns of 10% annually,” Hussman said. “A level of 1800 (a 62% loss) would bring our estimates of expected returns to a typical 5% risk-premium over and above current 10-year Treasury yields. A decline to about 2750 on the S&P 500 (a 42% loss) would bring our estimates of 10-year S&P 500 total returns merely in line with the prevailing 4% yield on 10-year Treasury bonds.”

He added: “None of these figures are forecasts, but they do represent historically consistent estimates of the potential market losses that would be needed to restore pedestrian levels of long-term expected return. I realize that estimating potential market losses of 42-65% may seem preposterous, but as I wrote in March 2000, ‘If you understand values and market history, you know we’re not joking.'”

Hussman’s track record — and his views in context

Perhaps one contradiction in Hussman’s argument is in his assessment of investor sentiment.

His “market internals” measure says investors aren’t inclined to take risks. Yet Hussman also points out that investors are eager to get off of the sidelines as the Fed gets ready to pivot.

“The advance that we’ve observed, particularly in recent weeks, reflects a nearly frantic expression of pent-up ‘fear of missing out’ on a Fed pivot that investors hope will extend the bubble,” Hussman said.

Other measures of market breadth also show improvement, while Hussman’s remains “unfavorable.”

“Over the past month, we’ve experienced arguably the best stretch of breadth improvement in 2023. The equal weighted S&P 500 has outperformed the cap weighted S&P 500 by 4% since the middle of November,” said Mike Wilson, the chief US equity strategist at Morgan Stanley, in a December 18 note. “Further, the percentage of S&P 500 members above their 200-day moving average reached 78% last week, matching the highest level this year. This is an encouraging sign. It will be important to see this dynamic continue as we progress beyond year end and into 2024.”

Still, Hussman’s measure has performed impressively in the past, and stocks are just about flat since the market’s peak when his gauge turned negative.

Ultimately, how strong the US economy remains in the months ahead will largely influence how stocks perform in the near-term. For now, a soft landing looks to be in sight, with the unemployment rate at 3.7% and inflation at 3.1%. Of course, that could shift going forward.

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 continued to grind mostly higher, he has persisted with his doomsday calls.

But before you dismiss Hussman as a wonky perma-bear, consider again his track record. Here are the arguments he’s laid out:

He 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.

He predicted in 2000 that the S&P 500 would likely see negative total returns over the following decade, which it did.

He predicted in April 2007 that the S&P 500 could lose 40%, then it lost 55% in the subsequent collapse from 2007 to 2009.

However, Hussman’s recent returns have been less than stellar. His Strategic Growth Fund is down about 46.8% since December 2010, and has fallen about 12.6% in the last 12 months. The S&P 500, by comparison, is up about 24.6% over the past year.

The amount of bearish evidence being unearthed by Hussman continues to mount, and his calls over the last couple of years for a substantial sell-off began to prove accurate in 2022. Yes, there may still be returns to be realized in this new bull market, but at what point does the mounting risk of a larger crash become too unbearable?

That’s a question investors will have to answer themselves — and one that Hussman will keep exploring in the interim.

This article was originally published by a www.businessinsider.com . Read the Original article here. .