Why the S&P 500 May Fall More Than 60%: Hussman

Investment manager and market watcher John Hussman, president of the Hussman Investment Trust, expects U.S. stocks to enter a wrenching bear market in the near future, with four major market indices plunging roughly 60% or more below their January highs, MarketWatch reports. Hussman gained widespread notice and credibility by forecasting the big market drops in 2000 and 2007–08.

Citing his "Iron Law of Valuation," Hussman offered this justification for his current extreme bearishness, as quoted by MarketWatch: "The higher the price investors pay for a given set of expected future cash flows, the lower the long-term investment returns they should expect. As a result, it’s precisely when past investment returns look most glorious that future investment returns are likely to be most dismal, and vice versa." (For more, see also: Why The 1929 Crash Could Happen In 2018.)

The Big Plunge Ahead, Per John Hussman

Index Jan. High % Plunge Implied Low Aug. 3 Value Implied % Drop From Aug. 3
S&P 500 Index (SPX) 2,873 (64%) 1,034 2,840 (64%)
Dow Jones Industrial Average (DJIA) 26,617 (69%) 8,251 25,463 (68%)
Nasdaq 100 Index (NDX) 7,023 (57%) 3,020 7,395 (59%)
Russell 2000 Index (RUT) 1,616 (68%) 517 1,673 (69%)

Sources: MarketWatch, Yahoo Finance


Morgan Stanley recently warned of an impending market correction which would be the worst since the one in late January and early February. A correction of 10% or so, however, would be be a mere blip compared to the carnage Hussman is forecasting. Hussman also is considerably more bearish than figures such as former Office of Management and Budget (OMB) Director David Stockman and respected emerging markets fund manager Mark Mobius, who have called for declines in the range of 30% to 40%. (For more, see also: Bullish Signal Not Seen in 60 Years May Fuel S&P Rally: Jeff Saut.)

Detractors call Hussman a "permabear," MarketWatch notes, a stopped clock that is bound to be correct eventually. That is, over the course of the current bull market that began in 2009, he has issued repeated warnings that a sharp reversal is drawing near, with his favorite mantra being that the market is "overbought, overvalued, overbullish."

Dangers of Narrow Breadth

Goldman Sachs has reported that market breadth has been very low so far in 2018. Just 10 stocks, nine of them fitting a broad definition of being in the technology field, accounted for 62% of the total return for the S&P 500 Index for the year-to-date through July 26. Goldman indicates that narrow breadth normally puts the market in a precarious situation, since a loss of investor confidence in the market leaders, which typically have become expensive and crowded, can precipitate a general wave of selling. (For more, see also: The Bullish Case for Tech Stocks: Goldman.)

But No Immediate Danger

On the other hand, Goldman's recent report offers three important reasons for optimism. First, in periods of low overall returns for the market, it takes only a few stocks to propel those modest gains. Second, in 2018 projections of robust earnings growth are broad-based, and not concentrated in just a few market leaders. Third, the recent travails of Facebook Inc. (FB), formerly a market leader, have been largely shrugged off by investors in other companies. Jeffrey Saut, chief investment strategist at Raymond James, has a similar view about the Facebook situation, per the "Bullish Signal Not Seen in 60 Years" story cited above.

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