As stocks rebound from one of their worst stretches in years, a growing contingency of experts is sounding the all-clear.
After all, the S&P 500‘s flirtation with a bear market back in December pushed equities to more attractive levels. And given the Federal Reserve‘s recent monetary-tightening capitulation, it’s easy to conclude that the path of least resistance is higher.
But noted bear John Hussman— the former economics professor and current president of the Hussman Investment Trust— scoffs at this idea. While he acknowledges that valuations have come down, he says they’re still absurdly high.
In fact, using a proprietary margin-adjusted price-to-earnings metric, he finds that stock prices remain the most stretched since the Great Depression. This can be seen in the chart below.
“10% off the most obscene valuations in US history isn’t what I’d call a ‘bargain,'” Hussman wrote in a recent blog post. “As market conditions currently stand, valuations remain extreme and market internals remain negative.”
And as if those seemingly eye-bleeding valuations aren’t bad enough, Hussman says experts across Wall Street are giving investors false hope as they decide what to do next. He decries the fact that they’re so optimistic about earnings growth.
The disconnect there stems from the fact that the same analysts who hype up profit expansion are the ones who make the estimates. Hussman, on the other hand, says future earnings growth is “likely to fall short of what we’ve observed over the past couple of decades.”
“One of the more cringe-worthy features of the behavior of investment professionals here is the spectacle of Wall Street analysts touting the ‘reasonableness’ of valuations on the basis of year-ahead earnings expectations that they themselves are responsible for fabricating,” Hussman said.
He continued: “Just as in 2000 and 2007, instead of the investment profession acting as a historically-informed buffer to defend investors against reckless speculation, extrapolative projections like these are actually endorsed and encouraged by the very people who should know better.”
As with all of his incisive market comments, Hussman has a chart to back up his assertion. The one below plots the inverse of the margin-adjusted P/E plot seen above (blue line), and overlays a measure of subsequent 12-year annual returns for the S&P 500 (red line).
As you can see, the red line has closely tracked the blue one over time, on a lagging basis. This suggests that the S&P 500 has quite a ways to fall over the next several years — something that falls right in line with Hussman’s long-standing bear thesis. That certainly doesn’t jibe with the idea that profit growth is going to be some sort of market savior.
Hussman’s track record
For the uninitiated, Hussman has repeatedly made headlines by predicting a stock-market decline exceeding 60% and forecasting a full decade of negative equity returns. And as the stock market has continued to grind mostly higher, he’s persisted with his calls, undeterred.
But before you dismiss Hussman as a wonky perma-bear, consider his track record, which he breaks down in his latest blog post. Here are the arguments he lays out:
- Predicted in March 2000 that tech stocks would plunge 83%, then the tech-heavy Nasdaq 100 index lost an “improbably precise” 83% during a period from 2000 to 2002
- Predicted in 2000 that the S&P 500 would likely see negative total returns over the following decade, which it did
- Predicted in April 2007 that the S&P 500 could lose 40%, then it lost 55% in the subsequent collapse from 2007 to 2009
In the end, the more evidence Hussman unearths around the stock market’s unsustainable conditions, the more worried investors should get. Sure, there may still be returns to be realized in this market cycle, but at what point does the mounting risk of a crash become too unbearable?
That’s a question investors will have to answer themselves. And one that Hussman will clearly keep exploring in the interim.