Drawing on a recent quote from fellow market bear Jeremy Grantham, Juan Husman His most recent note to investors was titled: "This is where bear markets begin."
If Hussman's assessment of market conditions is to be believed, he is absolutely right.
In his May 6 market commentary, Hussman โ the president of the Hussman Investment Trust that named the stock market crashes of 2000 and 2008 โ said current market conditions are more ripe for a "major" spike than virtually at any other time in the last 100 years. Its proprietary measure, the โgroup proximity score,โ considers data such as investor sentiment, stock valuations, and fundamental, technical and cyclical indicators.
The indicator is shown below in green and red along with the S&P 500 price action in blue. The higher the red peaks, the more negative the indicator reading and vice versa for the green peaks.
Hussman Funds
While red and green "clusters" typically correspond to spikes and dips in the market, Hussman acknowledges that they don't have a perfect track record.
"It is emphatically neither an investment strategy nor a timing tool: the CPS can become quite favorable even in periods of unfavorable internal factors, as happened when the market fell towards the lows of 1972 and 1982. Likewise, the CPS can become quite unfavorable even in "favorable internal periods, as has sometimes happened in recent years. Still, when the key elements of our discipline align with the CPS, it is best to pay attention.โ
Two of those "key elements" that Hussman's CPS currently aligns with are stock valuations and investor sentiment, both poor at the moment, which Hussman sees as a recipe for disaster.
There are many ways to measure valuation, but the one Hussman prefers is its ratio between the market capitalization of non-financial stocks and the gross value added of non-financial stocks (basically, their total earnings).
Over the last year and a half, it has reached all-time highs again.
Hussman Funds
This valuation measure has an impressive track record of predicting S&P 500 returns over trailing 12-year periods, and current levels suggest negative annualized returns for the index over the next twelve years. Other common valuation measures are also historically high, including the Shiller CAPE ratio and the so-called Warren Buffett gauge of total market capitalization relative to GDP.
As for investor sentiment (or "market insider information," as Hussman calls it), it also uses its own indicator. He said it essentially tracks the "uniformity" of movement between individual stocks, which gives us a window into the level of investor optimism.
The indicator is shown below in red, with the S&P 500 price action in blue. When the internal market indicator generally stagnates, it has usually been bad news for stocks.
Hussman Funds
The macro image
Hussman has one of the most pessimistic outlooks on Wall Street, saying in recent months that stocks could fall more than 60% when the current market cycle is complete.
Meanwhile, most strategists at major Wall Street banks see the S&P 500 remaining above 5,000 through 2024.
This is partly because the macroeconomic outlook has improved compared to the first half of 2023, when the base case for most economists was a recessionary outcome.
But there is still some uncertainty about how the U.S. economy will fare in the coming years, as data on the labor market and broader consumer spending remain strong, forcing the Federal Reserve to delay cuts to the U.S. economy. interest rates to ensure that inflation does not resurface. The longer the Federal Reserve keeps rates high to hamper spending and borrowing, the greater the risks of recession.
Opinions vary on how strong the labor market really is. Major employment data has proven the bears wrong time and time again. But David Rosenberg, the chief economist at Rosenberg Research who called the 2008 recession, warned in several notes to clients last week that Major downward revisions are coming for the labor market several months away. This is due to a disparity between nonfarm payroll figures and data from the Business Employment Dynamics Surveys and the Bureau of Labor Statistics' Quarterly Census of Employment and Wages.
If Rosenberg's views come true, stocks could be set for a substantial drop, with valuations high and a bullish macro consensus among investors. Time will tell.
Hussman's record
For the uninitiated, Hussman has repeatedly made headlines by predicting a stock market crash surpassing 60% and predicting a full decade of negative stock returns. And as the stock market rose sharply, he persisted with his apocalyptic calls.
But before you write off Hussman as a permanent bumbling bear, consider his record again. These are the arguments he has put forward:
- In March 2000 he predicted that technology stocks would plunge 83%, then the tech-heavy Nasdaq 100 index lost an "improbably accurate" 83% over a period from 2000 to 2002.
- In 2000 he predicted that the S&P 500 would likely earn negative total returns over the next decade, and it did.
- In April 2007 he predicted that the S&P 500 could lose 40%, but then lost 55% in the subsequent crash from 2007 to 2009.
However, Hussman's recent returns have been less than stellar. His Strategic Growth Fund is down about 51% since December 2010 and has fallen 10.3% over the past 12 months. By comparison, the S&P 500 is up about 26% over the past year.
The amount of bearish evidence Hussman is uncovering continues to increase, and his calls over the past few years for a substantial sell-off have started to prove accurate in 2022. Yes, there may still be returns to be had in this new bull market. , but at what point does the increasing risk of a major accident become too much to bear?
That's a question investors will have to answer for themselves, and one Hussman will continue to explore in the meantime.
