After equities turned in their worst Christmas Eve on record, Hussman published a blog post calling market conditions “oversold and highly compressed.” With stocks having absorbed such a violent downward move, he argued that they were spring-loaded for a temporary surge.
“While we don’t presently observe conditions to indicate a ‘buying opportunity’ or a ‘bottom’ from a full-cycle standpoint, we do observe conditions that are permissive of a scorching market rebound, even if it only turns out to be the ‘fast, furious, prone to failure’ variety,” Hussman said on December 26.
Sure enough, that rebound transpired almost immediately. The Dow Jones Industrial Average spiked by more than 1,000 points the day after Christmas, its biggest single-day increase of all time. The index is up more than 6% since Hussman made his prediction.
So does this mark the end of Hussman’s notorious doomsaying? Has one of the market’s best-known skeptics changed his tune?
Don’t get your hopes up — Hussman is still expecting far deeper carnage in equities. He argues that the turbulent pre-Christmas period was simply a harbinger of more difficult times to come.
“Given the obscene valuations that the market reached at its highs, we would view a market decline to 1,192 on the S&P 500 to be a fairly run-of-the-mill cycle completion,” Hussman said.
That amounts to a decline of more than 50% from the S&P 500‘s current level, which is already 15% below record highs reached in September.
Hussman’s breaks down his bearish long-term view into three main considerations:
- Market internals are still “ragged and divergent”
- The most reliable valuation metrics — or those most highly correlated with forward 10- to 12-year market returns — “remain extremely elevated from the perspective of history and even of recent market cycles”
- Credit spreads are continuing to widen
In the end, even if the stock market’s near-term rally continues in earnest, Hussman thinks it would be foolish to turn fully bullish on the market. He doesn’t even think traders should consider removing hedges.
“There is no certainty about a rebound, and we wouldn’t dream of removing our safety nets against a market decline that I continue to expect to draw the S&P 500 toward the 1,000 level by the completion of the cycle,” Hussman said.
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 Hussman will clearly keep exploring in the interim.