A notorious market bear who called the 2000 and 2008 crashes warns current market conditions are worse than in 99.9% of history — typically meaning stocks are ripe for a 10%-30% sell-off

Feb 11, 2024

The S&P 500 surpassed 5,000 for the first time on Friday, riding a wave of investor optimism about the health of the US economy.

But according to John Hussman, the president of the Hussman Investment Trust who called the 2000 and 2008 market crashes, the record highs may not last long.

In a February 4 note, Hussman said that a group of stock-market indicators he monitors show that conditions are just about as worse as they’ve ever been and resemble those seen in major market peaks in recent decades. His list of indicators touch on stock valuations, investor sentiment, and other proprietary measures.

In a chart, Hussman compared today’s environment to some of the most similar episodes in market history. The higher the red bars go, the poorer conditions are. Right now, conditions are worse than during the peaks of the dot-com bubble and the 2008 financial crisis.

stock market conditions hussman

Hussman Funds

“Based on dozens of measures that include valuations, internals, overextension syndromes, and numerous technical, fundamental, and cyclical gauges we’ve developed over time, we estimate that current market conditions now ‘cluster’ among the worst 0.1% instances in history – more similar to major market peaks and dissimilar to major market lows than 99.9% of all post-war periods,” Hussman said.

“I call this the ‘Cluster of Woe’ because the handful of similarly extreme instances (most notably in 1972, 1987, 1998, 2000, 2018, 2020, and 2022) were typically followed by abrupt market losses of 10%-30% over the next 6-10 weeks (average -12.5%), with losses at the smaller end of that range often seeing deeper follow-through later,” he added.

Still, Hussman didn’t want to commit to a short-term prediction, saying: “Without making near-term forecasts, suffice it to say that current conditions are the sort of rare market extremes that tend to resolve badly.”

Let’s take a look at some of the indicators Hussman mentions, starting with valuations. Hussman prefers his proprietary measure of market cap of non-financial stocks to gross value added of those stocks. It’s currently hovering around the highs seen in 1929 and 2022.

hussman stock valuations

Hussman Funds

The measure’s correlation to long-term returns is impressively consistent. Today’s levels suggest -5% annualized returns over the next decade.

hussman stock valuations and subsequent 10 year returns

Hussman Funds

More mainstream valuation measures are also elevated. Here’s the Shiller cyclically adjusted price-to-earnings ratio, which is a rolling 10-year average to smooth out outlier events. It’s approaching its most extreme levels in history.

shiller CAPE


Next, let’s look at Hussman’s measure of what he calls “market internals.” It’s essentially a gauge of stock market breadth, and therefore a pulse on investor sentiment. It’s represented by the red line in the chart below, while the S&P 500 is shown in blue. When market internals are flat, stocks tend to go nowhere or incur big losses. For example, the gauge was fairly flat leading up to and during the 2000 and 2008 crashes.

hussman market internals

Hussman Funds

In prior notes, Hussman has called this combination of poor internals and extremely high valuations a “trap door” scenario.

Hussman’s views in context

As Hussman said, his argument isn’t necessarily that stocks will drop in the near-term — though conditions are ripe for that based on history, and even well-known market bull Tom Lee is calling for a pullback.

Rather, Hussman is warning of poor returns over a long-term basis, which will likely mean a more drawn-out decline. And the statistics back up this call.

Here’s a chart from a regression analysis by Bank of America showing the impact that valuations have on long-term stock market returns. Over the period of a decade, starting valuations explain 80% of the market’s returns.

stock valuations and long-term returns

Bank of America

Hussman’s measure of market breadth also matches up with other common indicators of how widespread participation in a market rally is.

“Declining shares modestly outpaced advancers last month and there were fewer S&P 500 stocks making new 52-week highs in January than in December,” said LPL Financial strategists Jeffrey Buchbinder and Adam Turnquist in a February 5 note. “This negative divergence, defined by the S&P 500 moving higher as breadth metrics move lower, further raises the odds of a potential pullback or consolidation phase for stocks.”

Despite weak breadth, however, various sentiment indicators show investors are optimistic. CNN’s Fear and Greed Index, for example, is in its highest category: Extreme Greed. If incoming macroeconomic data in the months ahead remains strong, this upbeat sentiment could lead to widening market breadth.

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 continued to grind mostly higher, he has persisted with his doomsday calls.

But before you dismiss Hussman as a wonky perma-bear, consider again his track record. Here are the arguments he’s laid out:

  • He predicted in March 2000 that tech stocks would plunge 83%, then the tech-heavy Nasdaq 100 index lost an “improbably precise” 83% during a period from 2000 to 2002.

  • He predicted in 2000 that the S&P 500 would likely see negative total returns over the following decade, which it did.

  • He predicted in April 2007 that the S&P 500 could lose 40%, then it lost 55% in the subsequent collapse from 2007 to 2009.

However, Hussman’s recent returns have been less than stellar. His Strategic Growth Fund is down about 50.8% since December 2010, and has fallen about 12.7% in the last 12 months. The S&P 500, by comparison, is up about 23% over the past year.

The amount of bearish evidence being unearthed by Hussman continues to mount, and his calls over the last couple of years for a substantial sell-off began to prove accurate in 2022. Yes, there may still be returns to be realized in this new bull market, but at what point does the mounting risk of a larger crash become too unbearable?

That’s a question investors will have to answer themselves — and one that Hussman will keep exploring in the interim.

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