Key Takeaways:
- Market veteran John Hussman cautioned that stocks might deliver disappointing returns over the next 12 years.
- Hussman highlighted signs of significant overvaluation in the stock market, driven by investor fear of missing out (FOMO).
- According to Hussman, the market appears to be approaching a peak, as outlined in a recent note.
Renowned investor John Hussman believes that the recent rally in stocks, driven by FOMO, may be nearing its peak, potentially leading to dismal returns for over a decade. Despite the S&P 500 hitting numerous all-time highs in 2024, Hussman warns that much of this surge is driven by Wall Street’s fear of missing out. He highlights various factors contributing to this fear, including record nominal highs, optimism about an economic soft landing, expectations of lower interest rates, and excitement surrounding artificial intelligence.
Hussman expresses concern over current market valuations, suggesting that they are likely to result in weak to dismal total returns over the next 10 to 12 years, along with significant losses over the full market cycle. One particular valuation measure he references, the S&P 500’s ratio of nonfinancial market capitalization to corporate gross value-added, indicates that stocks are currently at their highest valuation levels since 1929, a period preceding the Great Depression.
Hussman emphasizes that the valuation measure he references has historically been highly correlated with total returns for the S&P 500 over the subsequent 10 to 12 years. This suggests that investors currently betting on stocks may face disappointment in terms of long-term returns.
Moreover, the estimated 12-year nominal return on a conventional investment portfolio, comprising 60% investment in the S&P 500, has dropped below 0%. This marks the lowest estimated returns since the 2020 recession, indicating a challenging investment landscape ahead.
While it cannot be definitively stated that stocks have reached a market peak, Hussman underscores that present conditions closely resemble those preceding market peaks. As someone who accurately predicted the market crashes of 2000 and 2008, Hussman has maintained a bearish stance on stocks for several months. He has previously highlighted a “cluster of woe” facing the stock market and suggested that a significant drop of up to 65% in stock prices would not be surprising, although he has refrained from making an official forecast.
Furthermore, Hussman believes that recession risks persist in the economy, making the possibility of an impending downturn a legitimate concern for investors. He anticipates substantial rate cuts to occur this year, similar to those implemented by the Federal Reserve during the recessions of the early 2000s and the 2008 Great Financial Crisis.
Despite these warnings, many investors remain bullish on stocks as the market’s rally persists. According to an index maintained by the Yale School of Management, individual investors are currently exhibiting the highest level of bullish sentiment on stocks since 2007.
Hussman highlights that recession risks remain prevalent in the economy, labeling the potential for an impending downturn as a “valid” concern for investors. He anticipates significant rate cuts to be implemented this year, akin to the substantial cuts made by the Federal Reserve during the recessions of the early 2000s and the 2008 Great Financial Crisis.
Despite these looming risks, many investors appear oblivious to the potential for a downturn. The ongoing rally in the market has led to a surge in bullish sentiment among individual investors, reaching levels not seen since 2007, as indicated by an index maintained by the Yale School of Management.