Stocks could lose half their value if the history of valuation cycles is any indication, warns star mutual-fund manager John Hussman, president of Hussman Investment Trust.
Repeating his call for a decline in the S&P 500 of 40 percent to 55 percent, Hussman says investors should also expect paltry total returns of 2 percent a year for next decade.
“From present valuations, a market loss of that magnitude would not be a worst-case scenario, but merely a run-of-the-mill completion of the current market cycle,” he writes in an April 18 commentary
. “Since the dividend yield on the S&P 500 exceeds 2 percent here, that also implies that we fully expect the S&P 500 Index to trade at a lower level in 10-12 years than it does today.”
The S&P 500 has risen 15 percent since mid-February, when collapsing oil prices and worries about a slowing Chinese economy pressured stocks. Since then, oil has risen 65 percent to a high of about $43 a barrel on signs that oil-producing countries will agree to cut output. The Federal Reserve also indicated that interest-rate hikes will be gradual because of concerns about slowing economic growth.
Hussman points to past periods of when markets sank after getting too expensive like now:
- 1901 (followed by a 46 percent market retreat the following three-year period)
- 1906 (followed by a 45 percent retreat the following year)
- 1929 (followed by a 89 percent collapse the following three years)
- 1937 (followed by a 48 percent loss the following year)
- 2000 (followed by a 49 percent market loss the following two years)
- 2007 (followed by a 57 percent market loss the following two years)
- A few lesser extremes occurred in the 1960s and 1970s, followed by market losses in the 35 percent to 48 percent range.
Hussman blames the Federal Reserve for encouraging rampant speculation with its policies of driving down borrowing costs in an attempt to juice the economy. The central bank cut rates to nearly zero percent in 2008 as the bursting of a major housing bubble led to a global economic slowdown.
“These policies have produced no benefit to the real economy (output, employment, industrial production) compared with what could have been predicted solely on the basis of non-monetary variables,” Hussman writes. “But these policies have fueled the third financial bubble since 2000.”
Ed Yardeni, noted economist and Newsmax Insider, says unconventional monetary policies like quantitative easing and zero interest rates have become so commonplace that they can now be considered conventional – and ineffective.
“Given the extraordinary amount of monetary stimulus, it is remarkable that inflation isn’t well above 2 percent,” he writes
. “If someone had predicted back at the start of 2008 that the combined balance sheets of the Fed, ECB, BOJ, and PBOC, measured in dollars, would be up 157 percent through March of this year, the chorus of critics would have said that’s not possible since the resulting hyperinflation would force the central banks to cease and desist such folly.”
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