- John Hussman warns of weak S&P 500 returns over the next 12 years.
- High ratings suggest potential underperformance against Treasurys.
- Hussman’s past predictions include accurately predicting the 2000 and 2008 crashes.
Before investing in the stock market, John Hussman urges investors to keep in mind that return outcomes ultimately have different probabilities based on when you buy.
While the S&P 500 has averaged 10.5% annual returns since 1957, that doesn’t mean these are the average returns you’ll get no matter when you enter the market.
“It’s like walking into a house with two rooms, one at 0 degrees and one at 140 degrees, and expecting a temperature of 70 each time,” said Hussman, president of the Hussman Investment Trust who called the 2000 and 2008 collapses, in a note dated October 17.
For example, if you bought on February 14, 2020, you will be up 71%. But if you bought just over a month later, at the end of the pandemic-induced crash on March 20, you’re up 152% now. Both are great results, no doubt. But they are very different. And in business cycles where monetary and fiscal stimulus is not as strong, the market can take much longer to recover.
Right now, several different variables indicate that investors should expect poor results over the next 12 years if they were to invest in the S&P 500 today, Hussman said.
First, there are levels of assessment. Hussman’s primary measure is the market capitalization of nonfinancial stocks divided by the total gross value added of these stocks. The metric is at all-time highs, surpassing the biggest bubble tops in history.
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Hussman likes it a lot because it has been a pretty good predictor of 12-year market returns compared to 10-year Treasury returns. Here is the relationship between expectations and actual market returns. Current expectations have the S&P 500 underperforming Treasuries by 9.9% annually over the next 12 years.
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Then there’s investor sentiment, which Hussman measures through the uniformity of movement across thousands of securities. In the chart below, when the measure is stable as in 2000 and 2008, it has historically been bad for stocks.
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Finally, there are accumulating warning signs of market overextension that rival previous bearish periods. Individual warning signs that Hussman monitors are various technical indicators, such as the S&P 500 being within 2% of its 5-year high, while less than 72% of stocks are below their 200-day moving average and 2.5% of stocks are new. -The highs and lows of the week at the same time, among other conflicting signals.
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Hussman’s data – and his views in context
Hussman’s view is often seen as extreme, and perhaps quite so. But the valuations are causing skepticism about the market’s future returns among others on Wall Street, even if not on the same scale.
Earlier this week, Goldman Sachs predicted that the S&P 500 will average 3% annual returns over the next decade. That’s less than the 4.2% annual yield offered by the risk-free 10-year Treasuries.
It’s also worth remembering that Hussman’s outlook is only for a 12-year period if you’re buying now — not if you plan to hang around for decades.
For the uninformed, Hussman has repeatedly made headlines by predicting a stock market decline passing 60% and predicting a full decade of negative returns on capital. And while the stock market largely rallied, he continued his calls for the end of the world.
But before you dismiss Hussman as a perpetual freak bear, consider his past again. Here are the arguments he presented:
- He predicted in March 2000 that technology stocks would fall 83%, and then the tech-heavy Nasdaq 100 index lost an “improbably accurate” 83% over the period from 2000 to 2002.
- He predicted in 2000 that the S&P 500 would probably see negative total returns over the next decade, which it did.
- He predicted in April 2007 that the S&P 500 could lose 40%, then lost 55% in the subsequent decline from 2007 to 2009.
Hussman’s recent returns, however, have been less than stellar. Its Strategic Growth Fund is down about 55% since December 2010 and is down 16% in the past 12 months. The S&P 500, by comparison, is up about 39% over the past year.
The amount of bullish evidence being uncovered by Hussman continues to grow, and his calls over the past two years for a significant selloff have started to prove correct in 2022. Yes, there may still be returns to be made in this new bull market, but at what point does the rising risk of a bigger crash become too unbearable?
That’s a question investors will have to answer for themselves — and one Hussman will continue to explore in the interim.