John Hussman Advocates Holding Large Cash Positions, Fears A Crash Is Coming
John Hussman, president of the Hussman Investment Trust, says, "I thought it might have been the pumpkin pie, but on further analysis, it's because current market conditions are so familiar," Hussman said in his December market commentary.
There's the Federal Reserve's creation of a zero-interest-rate environment. With out the security of interest producing bonds, investors are forced to find returns in riskier assets like equities (In 2000s people turned to mortgage-backed securities).
As investors move toward equities to find better returns the new demand causes their price to shoot up as we are seeing now with the market hitting all time highs recently.
"The notion that 'there is no alternative' but to speculate has again saturated the minds of market participants, driving S&P 500 valuations to levels that are now beyond every historic extreme, including 1929 and 2000, even if we completely exclude economic losses due to the COVID-19 pandemic," Hussman said.
Hussman says the fact that the Fed too often is there to save the day when the market crashes is just prolonging the problem.
"The perpetual speculation of Wall Street relies on confidence that every market retreat will be met by another Federal Reserve stick-save," Hussman said, the emphasis his. "Yet all of these stick-saves by the Federal Reserve defer a financial collapse only by amplifying its eventual size."
Hussman says price-to-earnings ratio levels are at all-time highs. Given this extreme territory for valuations, Hussman projects what amounts to a sort of no-return world.
Over the next 12 years, he estimates the S&P 500 will return -3.6%. For portfolios with a 60% allocation to the S&P 500, 30% to Treasury bonds, and 10% Treasury bills, he predicts a -1.7% return.
"Stock prices haven't just priced in a recovery. They're already beyond where they were before the pandemic," Hussman said.
"Indeed, we currently estimate that the average annual nominal total return of the S&P 500 is likely to lag the returns of Treasury bonds, by fully -4.6% during the coming 12-year period. So much for the notion of an 'equity risk premium.'"
To further his point referred to the return estimates for Treasury bills, Treasury notes, corporate bonds, utilities, and the S&P 500 for the following 10 years at points right before various market pullbacks: February 2020, March 2009, October 2007, October 2002, March 2000, and August 1982.
Hussman compared valuations level of equities and said "You'll notice that extreme valuations aren't always immediately associated with drawdowns......which occur during periods when a bubble is expanding," he said.
"Unfortunately, the drawdowns generally arrive with a vengeance. At present, we expect the current cycle to be completed by a market loss on the order of 65-70%."
He added: "Yes, I know. A drawdown of 65-70% sounds insane and utterly preposterous, but the revulsion to that idea is largely due to pervasive speculative psychology, not historical evidence, cash flows, or fundamentals."
Morgan Stanley's Mike Wilson has said that even though valuations of large-cap growth stocks at the top of the S&P 500 are too high to lend themselves to much near-term appreciation, the market will be driven up 8% next year by surging price action in value and cyclicals as the economy recovers.
Wilson predicted the last two market sell-offs with high precision, and told Business Insider that while the indicators he used to make those predictions "are still flashing signs of exhaustion," he's not making a call for even a 10% drop.
Goldman Sachs has said the S&P 500 will rise next year by 20%.
JPMorgan has predicted that the market will surge 26% in 2021.
For the uninitiated, Hussman predicted a similar drop in January of 2018 that didn't happen. However, before you dismiss Hussman, consider his track record, which he broke down in a recent blog post.
- 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 from 2007 to 2009.
Hussman's Strategic Growth Fund is down about 50% since December 2010, though it's risen more than 11% in the past year.