Stock market conditions are among the worst in history, said markets guru John Hussman.
The market is likely to experience sudden and steep declines, similar to other periods of weakness like 1987 and 2000.
A stock market drop as big as 65% wouldn't be surprising, Hussman said.
Stock market conditions are among the worst in history, and investors are likely to experience sharp declines alongside more extreme sell-offs, veteran investor John Hussman wrote in a note this month.
The chairman of the Hussman Investment Trust… who predicted the market downturns of 2000 and 2008 – warned investors of more fallout to come for stocks. That's because the market is in what he described as a “doom group” and conditions for making money are among the worst in history, he warned.
Stocks look the most overvalued since 2021 and since the five weeks surrounding the start of the new year in 1929, Hussman said, citing his investment firm's “most reliable valuation metrics.”
If stocks were to continue to advance, internal market fundamentals would likely shift toward unfavorable conditions like those that preceded “the most extreme losses” in the market since 2007.
“We estimate that current market conditions now cluster among the worst 0.1% in history – more similar to major market peaks and different from major market lows than 99.9% of all market periods. postwar,” Hussman said in a recent memo.
Other “equally extreme cases,” including the 2000 dot-com bubble, have typically been followed by a “sharp” stock market decline, Hussman said. These losses varied between 10 and 30%, and were spread over six to ten weeks.
The losses could be even greater this time, given the state of the stock market, Hussman added.
“Without forecasting, it's fair to say that we would not be surprised by a near-term market loss in the order of 10% or more for the S&P 500, nor by a market loss in the order of 10% or more over the entire full cycle. at 50-65%, nor an American recession that the consensus seems to have ruled out.”
After a slow start to the year, stocks are back rally fashionwith the S&P 500 gaining 4% year to date as investors raise their hopes for a soft landing and price in sharp rate cuts from the Federal Reserve.
But optimism around rate cuts could soon fade, some analysts warn, as investors overstate the amount of monetary policy easing coming this year. Central bankers have planned only three cuts in 2024, about half the amount markets expected, according to the CME FedWatch tool.
In the meantime, a recession is not excluded this year. The United States has a 61% chance of falling into a recession by January 2025, the New York Fed estimates, even as market analysts increasingly argue in favor of a no-landing scenario that would see the strong economy for the foreseeable future.
“I have the impression that investors are feeling an almost unbearable 'fear of missing out' in the face of the nominal record highs of the S&P 500 and the Nasdaq 100, the enthusiasm generated by an economic 'soft landing' and the 'pivot 'expected toward lower interest rates,' Hussman said. said. “In my view, abandoning systematic investment discipline during the most extreme market conditions in history would be a costly way to buy a fleeting sign of relief.”
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