Expert Warns Outlook for Returns As Bad As 1929

Hanah Lopes
  • John Hussman warns the outlook for stocks in the long-term is still poor.
  • He compared the current outlook to those in 1929 and 2000 in terms of long-term returns.
  • The S&P 500 has rallied in recent weeks after falling 13% to start the year.

Some might argue that the outlook for returns in the stock market has improved following the first negative quarter in two years. Investors have discounted steep and persistent inflation, as well as the effects of geopolitical conflict, the argument may go.

JPMorgan’s quant chief Marko Kolanovic, for example, said in mid-March to buy the dip. 

“A lot of risk is already priced in, sentiment is depressed and investor positioning is low, so we would add to risk with a medium-term horizon,” Kolanovic said.

But for John Hussman, that kind of approach remains nonsensical. In a recent commentary, the president of the Hussman Investment Trust who called the 2000 and 2008 market crashes compared investing in the current environment to gambling in a casino, given where valuations are.

“Valuations do not provide an environment for ‘intelligent investment’ here, nor do market internals provide an environment for ‘intelligent speculation,'” he said. “Aside from very minor tactical shifts, the main opportunity that investors have in the current environment is the opportunity for baseless gambling.”

All of what Hussman calls the most reliable valuation measures in terms of their relationship to future performance remain more extreme than their levels in 2000, 2008, 1987, and so on. They’re shown in the chart below.

valuation measures

Hussman Funds

“Regardless of which measure you choose, you’ll find that the estimated 12-year average annual total return for the S&P 500 is negative based on the current level of valuations relative to their historical norms,” Hussman said, the emphasis his. “The only debate is how negative. Investors do not somehow ‘put their money to work’ by chasing stocks at record valuations.”

In addition to valuation measures alone, Hussman shared another indicator that has been a reliable indicator of future returns: his own model of the equity risk premium, or the excess return a stock market investor can expect over investing in risk-free Treasury bonds.

Hussman’s model takes into account, in blue, the implied 12-year returns of the market given current valuations — measured by the average margin-adjusted price-to-earnings ratio of the market before 1950 and the ratio of total

market cap

to gross value added after 1950 — above expected 12-year returns from Treasury bonds. The red line represents the S&P 500’s actual return over the next 12 years. 

Equity risk premium compared with subsequent market returns

Hussman Funds

The two lines can become relatively disconnected in the near-term, like they did around the dot-com bubble and the financial crisis, but over a longer period of time the indicator is more accurate, he said.

Hussman’s track record — and his views in context

Valuations certainly make the prospect of longer-term returns less attractive. Bank of America’s Head of Equity and Quantitative Strategy Savita Subramanian has illustrated this on multiple occasions, citing the impact that valuations have on stock market returns over different periods of time. 

Over a 10-plus-year period, they can explain 80% of the market’s performance, she said.

Screen Shot 2021 04 16 at 2.59.07 PM

Bank of America

Given this, Subramanian said in recent months that her model shows the S&P 500 will deliver negative returns over the next decade, excluding dividends.

In the near-term, however, as Hussman and Subramanian pointed out, valuation plays less of a role. Goldman Sachs also pointed this out in their 2022 outlook commentary.

Again, some remain constructive on stocks for the rest of this year, partly due to the amount of bad news investors have already discounted, and partly because they view a


as unlikely. The median 2022 price target on Wall Street for the S&P 500 is about 4,900, about 8% higher than Friday’s close near 4,545.

But the threat of a recession has continued to grow this year, as 40-year-high inflation shows no sign of cooling off and the

Federal Reserve

adjusts their policy accordingly. Wells Fargo’s top macro strategist Michael Schumacher, for example, said last week that the chance of a recession increases daily, and said there’s a 50% chance the US economy sees one this year. Such a scenario would presumably bode poorly for stocks.

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 doomsday calls.

But before you dismiss Hussman as a wonky perma-bear, consider again his track record. Here are the arguments he’s laid out:

  • He 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.

However, Hussman’s recent returns have been less-than-stellar. His Strategic Growth Fund is down about 45% since December 2010, and it’s down about 3.7% in the last 12 months. The S&P 500, by comparison, has returned 10.8% over the past year.

The amount of bearish evidence being unearthed by Hussman continues to mount. 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.

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