The recent stock market retreat, which has sent the S&P 500 Index (SPX) down by 5.9% from its intraday high on Oct. 3, has intensified the debate between the bulls and the bears. Outspoken economist, hedge fund manager and market analyst John Hussman is renewing his prediction of a severe market crash that would send major U.S. stock market indices plummeting by 60% or more. He has been warning that stock valuations have been extreme for years, and long overdue for a return to historical norms. (For more, see also: Why the S&P 500 May Fall More Than 60%: Hussman.)

Putting this in dollar terms, Hussman recently said that the crash will wipe out $20 trillion of stock market value, Business Insider reports. "The only time we've ever seen a confluence of risk factors anywhere close to those of today was the week of March 24, 2000, which marked the peak of the technology bubble," he wrote in a recent blog post quoted by Business Insider. The table below compares Hussman's prediction to other big crashes in the past.

How Hussman's Bearish View Compares to Past Meltdowns

Crash Drop in S&P 500
Hussman's prediction for 2018 onward (60%)
2007–2009 Financial Crisis (56.8%)
2000–2002 Dotcom Crash (49.1%)
1987 Crash (33.5%)
1929 Crash (1929 to 1932) (82.7%)

Sources: Yardeni Research for previous crashes; Investopedia for Hussman.

Why Investors Should Worry

As the table illustrates, while Hussman's prediction is severe, a drop of that magnitude is far from unprecedented. In fact, it is not much worse than the last bear market that ran from 2007 to 2009. Also, some other market indices fared even worse than the S&P 500 in these episodes. Most notably, the tech-heavy Nasdaq Composite Index (IXIC) shed 78% of its value in the dotcom crash.

Based on the Russell 3000 Index, the market value of all publicly traded U.S. stocks reached $30 trillion in January, per Barron's. Since then, the Russell 3000 has fallen by 1.5%, suggesting that its market value is just slightly lower today. As a result, the $20 trillion plunge predicted by Hussman would represent roughly a 66% decline. Other prominent investors and market watchers have issued bearish forecasts in 2018, as summarized in the table below.

Stock Declines Predicted By Other Bears

Forecaster Decline Prediction
Dan Niles, hedge fund manager (50%)
David Stockman, former OMB director (40%)
Dan Minerd, chief investment officer, Guggenheim Partners (40%)
Daniel Pinto, co-chief operating officer, JPMorgan Chase (20%) to (40%)
Mark Mobius, emerging markets fund manager (30%)

Source: Investopedia; follow links to specific stories.

Hussman takes particular aim at the Federal Reserve's post-financial crisis policy of quantitative easing that has propped up asset prices. He also wrote, in that same recent blog post quoted by Business Insider: "The current back-slapping about the success of extraordinary monetary policy is a lot like declaring victory in a football game at halftime, just before a flock of fire-breathing dragons swoops onto the field and eats the leading team. We have to allow for the possibility that the second half of the game will be violently unrecognizable. The Fed created yet another yield-seeking bubble that has encouraged vastly expanded indebtedness in every sector of the economy."

For much of the current bull market, Hussman has been warning that stocks are overvalued and on the brink of a nasty fall, yet they have surged to record highs. In his recent blog he counters that he predicted the dotcom crash, negative returns for the S&P 500 in the decade after 2000, and the bear market of 2007 to 2009, Business Insider notes.

Meanwhile, billionaire hedge fund manager Stanley Druckenmiller sees a massive debt crisis brewing around the around the world, per another Business Insider story. Like Hussman, he believes that easy money policies pursued by the Fed and other central banks around the world during the past decade have spurred excessive risk-taking and unsustainable levels of indebtedness. A bigger financial crisis than that of 2008 is likely to follow, in his opinion, once liquidity starts to shrink.

Looking Ahead

To state the obvious, bull markets do not last forever, and inevitably are followed by bear markets. Likewise, economic expansions also must end at some point, followed by recessions, and recessions typically are accompanied by bear markets. Accordingly, it makes sense for investors to start planning defensive measures. (For more, see also: 4 Ways to Avoid Big Losses in the Next Recession: JPMorgan.)

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