'Vulnerable to catastrophe': One market bear explains why stocks will crash 30% by the end of 2019 — and then completely flatline for the next 12 years

trader upset worried scared angry

  • Stocks are almost back at a new record high, and investors may
    think they dodged a bullet following the late-December market
  • John Hussman — the outspoken investor and former professor
    who’s been predicting a stock collapse — says overconfident
    traders are being lulled into a false sense of confidence.
  • He explains why he sees the benchmark S&P 500 tumbling 30%
    by the end of 2019 before trading completely sideways for the next
    decade or so.
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With the S&P
back within 1% of an all-time high, you may be thinking
stocks are headed for another lengthy period of strong gains.

After all, the ongoing 10-year equity expansion stared a bear
market in the face on Dec. 24 and rebounded with aplomb. What
doesn’t kill you makes you stronger, right?

Wrong, says John
, the former economics professor who is now president of
the Hussman Investment

For months, even years, he’s been telling anyone that will
listen that stocks are
just as overvalued now
as they were ahead of the 1929 and 2000
market crashes. And he views the post-December rebound as the
latest in a long series of bullish head fakes built on irrationally
exuberant sentiment.

Screen Shot 2019 04 12 at 12.18.54 PM

Hussman says it’s that overconfidence that will ultimately be
the market’s demise. In his mind, the recovery since the Dec. 24
bottom is exactly the type of development that makes investors put
their blinders up.

“Full-cycle risks have a way of emerging in ways that investors
wholly rule out at market peaks,” he wrote in a recent blog post.
“Glorious half-cycle market advances leave investors vulnerable to
catastrophe, because investors hold contempt for anyone who
suggests there may be a cliff on the other side of the

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What kind of catastrophe is Hussman expecting? His expectation
for a two-thirds loss in total market value is well-documented at
this point. But he has an updated forecast that calls for stocks to
drop 30% by the end of 2019.

To make matters more ominous, Hussman says the market’s ability
to reach a new record high is irrelevant in the grand scheme of
things. And that’s just the first half of his bearish call.

The S&P 500 will lose “an additional 50% of its remaining
value over the rest of the down-cycle,” Hussman said. “That, after
all, is how a market loses 65% of its paper value.”

He continued: “That’s not so much a forecast as a based case. A
65% loss, unfortunately, would presently represent a
run-of-the-mill cycle completion from current valuation

But what about the following decade? That’s where Hussman’s
forecast gets even more dire. He says that the S&P 500 will see
total returns averaging roughly zero over the next 12 years.

The scatter plot below offers a look at how Hussman is thinking
about the matter. It shows the relationship between the ratio of
market cap to corporate gross-value added, relative to subsequent
12-year returns. As you can see, that ratio is currently close to
the lowest on record.

Screen Shot 2019 04 12 at 12.48.57 PM

When faced with all of that evidence, a more bullishly inclined
investor might argue that valuations can normalize on the fly as
fundamental growth catches up to prices.

Hussman isn’t buying it.

“The main reason it’s unlikely is that it would require the
absence of even a single period of severe risk-aversion among
investors, for at least a decade or more,” he said. “Another reason
is that the question vastly underestimates the length of time that
would be required for fundamentals to ‘catch up’ with current

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So there you have it. Hussman is staunchly refusing to give up
his bearish stance. He does, however, acknowledge that investor
speculation can be an uncontrollable runaway train of sorts —
something that can defy market signals for uncomfortably long,
frustrating bulls like himself. That’s why he’s taking his foot off
the brake somewhat.

“All of this effort to jam the speculative bit back into the
horse’s teeth requires us to adopt a rather neutral outlook here,
until we observe fresh deterioration in market internals,” Hussman

He continued: “Given the late-stage condition of the financial
markets and the economy, my sense is that, as in 1929, they may
just run this poor horse straight up and over the cliff.”

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 permabear, 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
    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.

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'Vulnerable to catastrophe': One market bear explains why stocks will crash 30% by the end of 2019 — and then completely flatline for the next 12 years