U.S. stocks contiued their downward plunge on Monday after suffering their worst performance in 2019 over the past week amid escalating trade tensions between the U.S. and China. The bad news: they may have a lot further to fall. A 65% stock-market crash would not be surprising in the eyes of John Hussman, former economics professor and current president of Hussman Investment Trust, who believes the risks are much greater now than they ever were during the dotcom tech bubble

“Given present valuation extremes, I continue to believe that a rather pedestrian, run-of-the-mill completion of the current market cycle would involve a loss in the S&P 500 of about two-thirds of the market’s value,” Hussman wrote in a recent blog post on Seeking Alpha.

Why This Market Is Riskier Than Dotcom Bubble

  • Dotcom Bubble: stocks fell 50%
  • Today’s Market: stocks could fall 65%

Source: John Hussman, Yahoo! Finance.

What It Means for Investors

It has only been a few weeks since U.S. stock markets, rallying off 2018’s end-of-year slump, were pushing to new record highs. But with trade talks between the world’s two largest economies hitting a snag, resulting in tariff hikes by the Trump administration on Chinese imports and retaliatory tariffs from China, investor expectations are beginning to turn sour. 

“The biggest problem is the huge disconnect with what markets have been hoping for and what is transpiring now. Markets had priced the best-case scenario and odds are shifting towards the worst-case scenario,” said Nader Naeimi of AMP Capital Investors Ltd. in Sydney. He added that, “China’s response was certainly not what risk markets were hoping for,” according to Bloomberg.

In addition to tariffs, Naeimi pointed to rising prices and a possible spike in oil prices amid fragile economic growth across the globe as some of the mounting risks that were transpiring into a “perfect storm” for complacent equities. 

Complacent is one word for them. Overvalued is another, in Hussman’s opinion, and unlike the dotcom bubble where it was mainly tech stocks that looked overvalued, Hussman thinks the whole market looks to be at the most expensive levels in history. 

“It’s worth remembering that—except for the 2000-2002 bear market, which ended at valuations that were still about 25% above historical norms—every other bear market decline in history, including the 2007-2009 decline, has taken reliable valuation measures to historical norms that presently stand between -60% and -65% below present market levels,” Hussman said.

Looking Ahead          

While not all analysts are as bearish, most believe that volatility will pick up in the near term as markets try to price in recent events and future risks. However, that volatility could extend beyond the near term if market surprises keep showing up, heightening the risk of bigger crash.

“I’d argue that we have to believe that the surprises in the market are going to be more toward the downside than the upside,” Jim Caron, fixed-income portfolio manager at Morgan Stanley Investment Management, told Bloomberg.