Market Watch: This Prophet of Doom Predicts Stock Market Will Plunge More Than 50%

Article by Sue Chang on Market Watch

John Hussman, president of Hussman Investment Trust, describes himself as an economist, a philanthropist, and a “realist optimist often viewed as a prophet of doom.”

Hussman’s claim to fame includes forecasting the market collapses of 2000 and 2007-2008.

In his most recent call, he argued that measured “from their highs of early-2018, we presently estimate that the completion of the current cycle will result in market losses on the order of -64% for the S&P 500 index, -57% for the Nasdaq, -68% for the Russell 2000 index, and nearly -69% for the Dow Jones Industrial Average.”

He admits the numbers seem extreme but says they are backed up by what he refers to as the “Iron Law of Valuation.”

“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,” he writes.

According to Hussman’s math, from 2009 to 2018, the S&P 500’s price sales ratio jumped from less than 0.7 to a multiple of 2.4 this year, the highest on record. And it’s not just that particular valuation metric that bothers Hussman. He also detects other signs of weakness.

“At present, our measures of market internals remain unfavorable, partly because of deterioration in interest/credit sensitive sectors, as well as tepid participation (the number of individual stocks participating in various market advances), divergent leadership (for example, a large number of stocks simultaneously hitting 52-week highs and lows), and the divergences we observe in an array of other sectors,” he said.

These trends suggest that investors are becoming less willing to take on risk, a bad sign for equities as stocks generally flourish when market participants are willing to make risky bets.

And he warns that the stock market won’t be able to escape this “danger zone” until it shifts to a less dangerous combination of valuations, internals and overextended conditions.

He provides numerous charts on valuations to back up his theory. “There’s always the hope that this time it’s different,” he said.

To read this article in its entirety on Market Watch, click here