John Hussman, a renowned stock market expert who accurately predicted the crashes of 2000 and 2008, is now sounding the alarm on the current state of the stock market. According to Hussman, the market is currently in a bubble that is set to burst, leading to a significant downturn.
In a recent note, Hussman stated that in order to restore long-term prospective returns, the S&P 500 would need to plunge a staggering 64 percent. He described the combination of historically rich valuations, unfavorable internals, and extreme overextension as placing the market at the most negative extremes he has defined.
Despite Hussman’s pessimistic outlook, the stock market has been performing well recently. The S&P 500 has rallied 19 percent in 2023 and has gained more than 400 percent since 2008. However, Hussman argues that the Federal Reserve’s interventions have contributed to the creation of a massive stock market bubble.
Hussman believes that the easy money policies implemented by the Federal Reserve, such as artificially low-interest rates and quantitative easing, have inflated the bubble. He points out that when the central bank attempted to normalize rates and shrink its balance sheet in 2018, the market reacted negatively, leading the Fed to revert to rate cuts and further expansionary monetary policies. In response to the pandemic, the Federal Reserve doubled down on easy money, making the bubble even bigger.
Although the stock market has rallied this year, Hussman sees this as a temporary rebound based on optimism rather than solid fundamentals. He argues that high valuations historically result in lower returns, and the current valuations are at historically high levels. Hussman’s predictions have a strong track record, as he accurately forecasted the tech stock crash in 2000 and the collapse of the S&P 500 in 2007.
Hussman dismisses the notion that the Federal Reserve will be able to save the market from a crash, highlighting that the central bank has historically eased monetary policy during market collapses. He believes that the worst market outcomes occur when the Fed is easing in an environment characterized by economic weakness and risk-averse investors. According to Hussman, a Fed pivot is unlikely to prevent the bursting of the current bubble.
While Hussman’s predictions may be concerning, it is important to maintain a balanced view of the situation. Other market participants have differing opinions on the outlook for the stock market. However, it is crucial for investors to carefully assess their portfolios and remain cautious amidst the potential risks identified by Hussman.
In conclusion, John Hussman, known for accurately predicting previous stock market crashes, is warning of an imminent crash in the current stock market bubble. Despite the recent rebound and positive performance, Hussman cites historically high valuations and the Federal Reserve’s interventions as indicators of an unsustainable market. Only time will tell if his predictions come to fruition, but it is vital for investors to consider the potential risks and remain vigilant in their investment strategies.
