“It always ended in tears”: A notorious market bear who called the dot-com bubble says investors are too confident that Fed support will continue to support “the most extreme valuations in …



  • Stock market valuations by some metrics are at all-time highs.
  • John Hussman says that does not bode well for future market returns.
  • He warned of potential negative returns over the next 12 years and a possible 66% crash.
  • See more stories on the Insider business page.

It has become a common justification among investors for a record current stock Exchange valuations: this is the Fed’s support.

The enhanced liquidity in the market thanks to the zero interest rate policy and the US central bank’s $ 120 billion per month asset purchases explain and excuse the high valuations, the argument goes. Another argument is that S&P 500 earnings have exceeded analysts’ expectations since the depths of the pandemic last year.

But at John hussman, the chairman of the Hussman Investment Trust, that is all wrong. And investors are making a big mistake by believing this story.

Hussman, who called the dot-com bubble, wrote in a recent Remark that investors do not understand how the Federal Reserve’s stimulus measures are actually supporting the markets. Its real effect is on the psychology of investors, he said. In other words, even if the Fed continues to provide liquidity, it doesn’t require stocks to stay high or be immune to poor performance.

“What ‘keeps the stock market‘ is not zero liquidity, at least not mechanically. It is a particularly distorted form of speculative psychology that rules out the possibility of loss, however severe the valuations are. “Hussman wrote in a September 12 note.

“We’ve never seen so much zero-interest base money before, but we’ve certainly seen the speculative psychology on which it is built, and it always ended in tears,” he added.

As suggested at the end of the quote above, Hussman warned that this speculative investor mindset would have serious consequences.

On the one hand, current valuations – which Hussman says are “the most extreme in history” – make it likely that future stock returns will be severely dampened. Hussman’s model predicts that the S&P 500 will return -6% over the next 12 years.

12 year returns

To measure valuations, Hussman uses the ratio of total market capitalization to the gross value added of the company. Hussman says it’s the most reliable predictor of future stock returns in terms of valuation metrics.

market valuations - market capitalization in relation to the gross value added of the company

In a more dire scenario, Hussman warns of the possibility of stocks falling 66% to return to normal valuation levels.

“At best, I believe [investors have] have placed themselves in a position that will likely be rewarded with a very long and interesting journey to nowhere over the next 10 to 20 years, ”he said. “At worst, they may find out the hard way that a retreat just to historically execute current valuations really means a two-thirds loss of the S&P 500.”

Below is a graph of a month of June Remark de Hussman showing that the S&P 500 tends to eventually revert to valuation standards, which he measures as the ratio of market capitalization to gross value added and the margin-adjusted price-to-earnings ratio.

s & p valuation and performance standards

Hussman’s background – and his opinions in context

Calls for a stock market pullback have intensified in recent weeks and months as stocks continue to climb.

Several eminent Wall Street strategists expect a correction in stocks by the end of 2021, some up to 20%. Investors were indeed eager to pull off gains when news of China’s Evergrande debt crisis emerged in recent days, although stocks rallied well in the second half of the week, rising by more than 3% from Tuesday’s lows.

A recent CNBC poll professional investors and strategists also found that 76% of those polled said it was time to be “very conservative” on the stock market.

Still, a 66% drop is a marginal view compared to most market views, and Hussman himself calls it the worst-case scenario. The call for disappointing future returns is more common.

For the uninitiated, Hussman has made headlines several times by predicting a stock market decline of more than 60% and the forecast of a a full decade of negative stock returns. And as the stock market continued to rise mainly, it persisted in its doomsday calls.

But before you think of Hussman as a wobbly permanent bear, think about his background, which he described in a recent blog post. Here are the arguments he puts forward:

  • He predicted in March 2000 that tech stocks would plunge 83%, then the tech-rich Nasdaq 100 index lost 83% “improbably accurate” over a period from 2000 to 2002.
  • Predicted in 2000 that the S&P 500 would likely experience negative total returns over the next decade, which it did.
  • Predicted in April 2007 that the S&P 500 could lose 40%, it then lost 55% in the collapse that followed from 2007 to 2009.

However, recent Hussman returns have been less than stellar. Its strategic growth fund is down about 48% since December 2010, although it has increased 3.7% in the last year. Still, the S&P 500 has returned over 37% over the same period.

Still, the amount of bearish evidence uncovered by Hussman continues to increase. Of course, there may still be returns to be made in this market cycle, but at what point does the growing risk of a crash become too unbearable?

That’s a question investors will have to answer for themselves – and one that Hussman will clearly continue to explore in the meantime.


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