Expert warns that prospects for returns are as bad as 1929

  • John Hussman warns that the long-term outlook for stocks remains dim.
  • He compared current prospects with those of 1929 and 2000 in terms of long-term profitability.
  • The S&P 500 has rallied in recent weeks after falling 13% at the start of the year.

Some might argue that the prospects for returns in the stock market have improved after the first negative quarter in two years. Investors have discounted pronounced and persistent inflationas well as the effects of geopolitical conflict, the argument can continue.

JPMorgan Quantitative Head Marko Kolanovićfor example, said in mid-March to buy the dip.

“A lot of risk has already been priced in, confidence is depressed and investor positioning is low, so we would increase risk with a medium-term horizon.” Kolanović said.

But for John Hussman, that kind of approach is still nonsense. In a recent commentary, the chairman of Hussman Investment Trust, describing the market crashes of 2000 and 2008, compared investing in the current environment to gambling in a casino, given where valuations are.

“Valuations do not provide an environment for ‘intelligent investing’ here, nor do internal market functions provide an environment for ‘intelligent speculation,'” he said. “Apart from very minor tactical changes, the main opportunity investors have in the current environment is the opportunity to gamble unsubstantiated.”

All of what Hussman calls the most reliable valuation measures in terms of their relationship to future performance remain more extreme than their levels in 2000, 2008, 1987, etc. They are shown in the graph below.

valuation measures

Hussman Funds

“Regardless of which measure you choose, you’ll find that the estimated 12-year average annual total return for the S&P 500 is negative based on the current level of valuations relative to their historical norms,” Hussman said, emphasis his. “The only debate is how negative. Investors somehow don’t ‘put their money to work’ by chasing stocks at record valuations.”

In addition to valuation measures alone, Hussman shared another indicator that has been a reliable indicator of future returns: his own model of the equity risk premium, or excess return that a stock market investor can afford. expect when investing in risk-free Treasury bonds.

Hussman’s model takes into account, in blue, 12-year market implied returns given current valuations, as measured by the market’s pre-1950 average margin-adjusted price-earnings ratio and the ratio of the total

market cap

to gross value added after 1950, above expected 12-year Treasury yields. The red line represents the actual performance of the S&P 500 over the next 12 years.

Equity risk premium compared to subsequent market returns

Hussman Funds

The two lines may become relatively disconnected in the short term, as happened with the dot-com bubble and the financial crisis, but over a longer time frame the indicator is more accurate, he said.

Hussman’s background and views in context

Valuations certainly make the prospect of longer-term returns less attractive. Savita Subramanian, Head of Equity and Quantitative Strategy at Bank of America, has illustrated this multiple times, citing the impact that valuations have on stock market returns over different time periods.

Over a period of more than 10 years, they can explain 80% of market performance, he said.

Screenshot 2021 04 16 at 2.59.07 pm

Bank of America

Given this, Subramanian said in recent months that his model shows that the S&P 500 will deliver negative returns over the next decade, excluding dividends.

However, in the short run, as Hussman and Subramanian pointed out, valuation plays a minor role. Goldman Sachs also pointed this out in its 2022 outlook comment.

Once again, some remain bullish on stocks for the rest of this year, in part because of how much bad news investors have already priced in, and in part because they see a


as unlikely. Wall Street’s median 2022 price target for the S&P 500 is around 4,900, about 8% higher than Friday’s close of around 4,545.

But the threat of a recession has continued to grow this year as inflation, the highest in 40 years, shows no signs of cooling off and the

Federal Reserve

adjust your policy accordingly. Wells Fargo’s chief macro strategist, Michael Schumacher, for example, said last week that the chance of a recession is increasing daily and said there is a 50% chance the US economy will see one this year. Presumably, such a scenario would bode badly for stocks.

For the uninitiated, Hussman has repeatedly made headlines by predicting a stock market decline of more than 60% and predicting a Entire decade of negative stock returns. And as the stock market has mostly continued to rise, it has persisted with its doomsday calls.

But before you dismiss Hussman as a rare perma bear, consider his track record again. These are the arguments he has put forward:

  • He predicted in March 2000 that tech stocks would drop 83%, then the tech-heavy Nasdaq 100 index lost an “improbably accurate” 83% over a period from 2000 to 2002.
  • He predicted in 2000 that the S&P 500 would likely see negative total returns for the next decade, and it did.
  • He predicted in April 2007 that the S&P 500 could lose 40%, 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 45% since December 2010, and is down 3.7% in the last 12 months. The S&P 500, by comparison, has returned 10.8% over the past year.

The amount of bearish evidence discovered by Hussman continues to mount. Sure, there may still be returns to be realized in this market cycle, but at what point does the mounting risk of a downturn become too unbearable?

That’s a question investors will have to answer for themselves, and one that Hussman will clearly continue to explore in the interim.

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