John Hussman predicted the 2000 and 2008 stock market crashes. Now he’s saying the current stock market bubble will “end in tears.”
In a recent note, the Hussman Trust president said the S&P 500 needs to plunge 64% in order to “restore run-of-the-mill long-term prospective returns.”
The present combination of historically rich valuations, unfavorable internals, and extreme overextension places our market return/risk estimates – near-term, intermediate, full-cycle, and even 10-12 year, at the most negative extremes we define. Yes, this is a bubble in my view. Yes, I believe it will end in tears.”
His pessimism may seem misplaced.
The S&P 500 has rallied 19% in 2023. Looking back since 2008, the index has gained more than 400%.
The Federal Reserve helped blow up this massive stock market bubble with a decade of artificially low-interest rates and easy money in the wake of the 2008 financial crisis. When the central bank tried to normalize rates and shrink its balance sheet in 2018, the markets threw a tantrum. Instead of pushing through, the Fed caved and went right back to rate cuts in 2019. It was already increasing its balance sheet through quantitative easing by the end of that year. With the pandemic, the Federal Reserve doubled down on the easy money and not only reinflated the bubble but made it even bigger.
The stock market went on a bear run last year as the Federal Reserve started raising rates and shrinking its balance sheet to fight price inflation that turned out not to be so transitory. But since the beginning of this year, stocks have rallied based on the mere hope that the tightening cycle is nearly over. We’ve also seen a big run-up in tech stocks with the excitement about artificial intelligence.
And as Jim Grant pointed out during a recent CNBC interview, despite the Fed rate hikes, the Chicago Fed Financial Conditions Index indicates that the current financial environment is still “easy.”
So, there’s a difference, as someone said recently, between tightening and tight. And by the standards of the Volker era, monetary policy is not yet tight. And yet, there are undeniable signs of stringency throughout finance.”
Hussman said he believes that stringency will end with a loud popping sound as the stock market bubble bursts.
Despite enthusiasm about the market rebound since October, I remain convinced that this initial market loss will prove to be a small opening act in the collapse of the most extreme yield-seeking speculative bubble in US history.”
As Hussman explained earlier this year, stock performance is a question of simple math. Higher valuations mean lower returns. And valuations are currently at historically high levels.
At present, our most reliable equity market valuation measures remain more extreme than at any point in history prior to July 2020, with the exception of a few months directly surrounding the 1929 peak, and two weeks in April 1930.”
Hussman has a pretty good track record of calling stock market collapses. In March 2000, he predicted that tech stocks would plunge 83%. The tech-heavy Nasdaq 100 index proceeded to lose an “improbably precise” 83% during a period from 2000 to 2002.
Then, in April 2007, Hussman warned that the S&P 500 could lose 40%. It ended up declining by 55% in the subsequent collapse from 2007 to 2009.
So, should we count on the Fed to rescue the market? Hussman said he doesn’t think so.
A decade of quantitative easing has led investors to imagine that Fed easing reliably supports the stock market, and that it is Fed easing that ends market collapses. The fact is that the Fed eased persistently and aggressively through both the 2000-2002 and 2007-2009 collapses. Historically, the worst market outcomes have typically occurred when the Fed is easing in an environment that combines economic weakness with risk-aversion among investors. If one believes that a Fed ‘pivot’ is something that investors should hope for, one is not paying attention.”
That’s not to say the Fed won’t pivot. Hussman is simply pointing out that it will be too little too late to reinflate this bubble.
