Driven by excessive valuations and central banks looking to prop up stocks at every turn, John P. Hussman — who correctly predicted the 2008-2009 financial crisis — today offered another dire forecast for the U.S. markets.
Hussman’s entire thesis is worth a read, if you’re so inclined, but the crux of the fund manager’s bearish outlook is boils down to his view that we’re in “the third most extreme financial bubble in history, on the basis of capitalization-weighted indices, and the single most extreme bubble in history from the standpoint of individual stocks.”
He believes that central bankers’ accommodative measures around the globe have simply delayed the inevitable pullback — not prevented it. Hussman notes that although the Fed and others have changed the rules of the game, that the outcome will be the same as it’s been in every other bubble across financial history:
Given current valuation extremes, I doubt that the median loss for any decile of stocks will be less than -40% over the completion of the current market cycle, and I expect that losses will approach -60% more typically than not. At some point in the not-too-distant future, my impression is that the “pain” of earning near-zero interest rates in safe liquidity will be far less daunting to investors than the pain of losing the bulk of their capital. Again, when risk-aversion kicks in during the completion of a market cycle, central bank liquidity does not reliably support stocks, because safe liquidity is seen as a desirable asset rather than an inferior one.
To be fair, Hussman has been making this exact same call for the past several years, and it’s yet to come to fruition. But his logic is sound and he provides a fair amount of evidence to bank his claims, so they warrant some consideration.
Of course, timing is everything in investing. So while Hussman will likely be proven correct eventually (since markets go through natural boom and bust cycles), it pays to remain open minded to a wide range of outcomes.
The SPDR Dow Jones Industrial Average ETF (NYSE:DIA) fell $0.84 (-0.46%) to $181.94 per share in Monday afternoon trading. Year-to-date, the only ETF tracking the DJIA has gained 4.69%.