- And John Hausmann warns that stocks will end up 60-70% lower than their January highs.
- He said stock valuations and investor sentiment remain weak.
- Hussain also called for 10-12 years of negative returns from January highs.
Discussions on Wall Street about a stock market bottom are underway after five grueling months beginning 2022. Since Jan. 3, the S&P 500 has fallen about 12%.
But for Jon Hausmann, stocks are nowhere near downside. That’s because ratings are still historically very high.
“Despite the year-to-date decline in the S&P 500, the most reliable valuation procedures we are monitoring remain at levels not observed in market history prior to August 2020,” Hussman, head of the Hussman Investment Trust launched in 2000 and 2008 The stock market crash, he said in a recent comment.
Hussman uses file
The ratio of non-financial equity to total value added (total revenue) as a key measure of stock market valuation because it says it has proven to be the most reliable indicator of subsequent returns. But by a range of valuation metrics, Hausmann said the market is still more overvalued than it was at the height of the dot-com bubble, if we look at it the number of times above the historical norm of the metric it is today. (1.0 is the historical standard for each scale.)
Hausmann said that the high ratings in and of themselves do not indicate problems. Rather, it is a period of rising valuations and weak investor confidence.
“It pays to think about valuations and the internal market jointly, not separately,” he said. “The market can continue to advance even in the face of extreme valuations, provided investors have a bit of speculation in their teeth (which we measure by standardizing the internals of the market). In contrast, extreme valuations can matter suddenly and with vengeance, once it turns Investor psychology toward risk aversion.
Hausmann uses the proprietary model to gauge the internals of the market, and he said they are currently “rippled and far apart.”
It also highlighted that the S&P 500 moved below its 200-day moving average, and showed charts comparing bubble tops in 2000, 2007 and now.
“Bull markets train investors to think of single V-shaped sell-offs followed by an advance to new highs. In bear markets, it is best to quickly let go of this thinking, preferably until the internal elements of the market improve. Once the internal market turns into a favorable state Uniformly, the 200-day average is starting to act as support rather than resistance.”
Hossam said stocks would fall 60-70% from their January highs, assuming that was the peak of the market. He also warned that the market faces 10-12 years of negative returns, on average, from January highs.
Hüsman’s record – and his views in context
Haussmann’s call for negative returns over the next decade given that high valuations were not unique. Savita Subramanian, head of equities and quantitative strategy at Bank of America, said in this regard in 2021. Others who made the call included Jeremy Grantham of GMOs, Barry Bannister Stifel and Lance Roberts of RIA advisors.
But Haussmann’s call for a 60-70% dip has fewer companies, apart from Grantham and some types of Perma Beer.
However, there are calls for the current heavy selling to continue to a lesser degree. CFRA’s Sam Stovall recently said that the S&P 500 could fall to 3450, or about 17% an additional decline. The index will reach a fair value of about 3,585, Glenmede’s Mike Reynolds said. Mike Wilson of Morgan Stanley said 3400 is a possibility given earnings risks such as
However, the average Wall Street strategist remains somewhat bullish for the rest of 2022, with an average price target for the S&P 500 index of around 4800 (a ~15% rise).
Investors have absorbed a lot of bad news in 2022, from the Fed’s shift to a hawkish stance to high inflation four decades ago to the persistent disruption of global supply chains. It remains unclear to what extent these inputs will improve or get worse as the second half of the year approaches.
For starters, Haussmann has repeatedly made headlines by predicting a stock market drop of more than 60% and predicting an entire decade of negative stock returns. With the stock market mostly continuing to rally, he insisted on doomsday calls.
But before you dismiss Haussmann as a perennial, wonky bear, think again about his track record. Here are his arguments:
- He predicted in March 2000 that tech stocks would fall 83%, then the high-tech Nasdaq 100 index would lose an “improbably accurate” 83% over the 2000-2002 period.
- He predicted in 2000 that the S&P 500 would likely see negative total returns over the next decade, which it did.
- He predicted in April 2007 that the S&P 500 would lose 40%, then lost 55% in the subsequent crash from 2007 to 2009.
However, Hossam’s recent comeback has been less than excellent. Its Strategic Growth Fund is down 43% since December 2010, although it has risen about 1.6% in the past 12 months. By comparison, the S&P 500 is down 0.4% over the past year.
The amount of bearish evidence discovered by Haussmann continues to grow. Sure, there may still be returns to be made in this market cycle, but at what point does the increased risk of a crash become unbearable?
This is a question that investors will have to answer for themselves — and one that Haussmann will obviously continue to explore in the meantime.
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