Next stock market crash: why a 65% loss would be historically normal

If you think that last week on the stock market was rough, you have not seen anything yet.

That's what John Hussman, a former economics professor, is saying today as president of the Hussman Investment Trust.

Hussman, known as "permabear", has long warned against latent risks of surface market exposure. And while stocks have not yet received the potential he expected, his tears are getting stronger as bearish conditions continue to calcify.

In his latest monthly post, Hussman has released a new interpretation of his long-time bearish vision. Not only does he expect a stock market crash in the region of 60 to 65 percent, but he also claims that such a fall would be quite normal by historical standards.

Allow him to explain.

"It should be remembered that – with the exception of the bear market of 2000-2002, which finished at a valuation still about 25% higher than the historical norm – all the other historical declines of this market, including the 2007-2009 decline, have put in place reliable valuation measures – historical standards that are currently between -60% and -65% below current market levels, "Hussman said.

"Given the current valuation extremes, I still believe that a rather mundane completion of the current market cycle would result in a loss of the S & P 500 index of about two-thirds of the value of the market ".

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According to Hussman, the alternative to returning values ​​to historically normal values ​​would be that the S & P 500 remains unchanged over a long period, thanks to improved corporate fundamentals.

This scenario would not require any negative market events. And given the magnitude of stock turbulence over the past week, this would seem like an unlikely or impossible outcome.

"It would take well over two decades, keeping the S & P 500 unchanged, so that valuations reach historically basic levels based solely on fundamentals growth," said Hussman.

"To maintain this type of" permanently permanent plateau ", there should be the same absence of a single episode of strong risk aversion among investors during this period."

Hussman also noted another important red flag: the nature of the overvaluation of the stock market. It is well known at this point that, according to his favorite measures, actions seem the most expensive in history. This is confirmed in the table below, which is one of his favorites:

Hussman Fund

But Hussman is not content to stop there. He says that "extreme" assessments such as those observed today are even more dangerous than another modern example: the tech bubble.

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Hussman notes that, at the time, the S & P 500's staggering level was almost entirely driven by technology stocks. Today, however, he finds that every decile of the benchmark is "sufficiently overvalued to allow for market losses of the order of -59% to -71%, without even going to against their respective valuation standards ".

In simpler terms: the market as a whole is historically expensive, not just a sample of over-processed stocks.

So there you have it. Hussman firmly refuses to give up his bearish position. However, he acknowledges that investor speculation may be an uncontrollable train, which may challenge the signals of the frustrating bull market like him. That's why he's taking a neutral stance at the moment.

The road map of Hussman

For the uninitiated, Hussman has made headlines by predicting a stock market downturn of more than 60% and anticipating a full decade of negative equity returns. And as the stock market continued to climb for the most part, he persisted in his appeals without getting discouraged.

But before dismissing Hussman as insightful, look at his record, which he breaks down in his latest blog post. Here are the arguments that he states:

• Expected in March 2000 that technology stocks would plummet by 83%, the Nasdaq 100 index, highly technology – driven, would lose 83% "of improbable accuracy" between 2000 and 2002.
• Expected in 2000 that the S & P 500 would likely have negative total returns over the next decade, which has
• Scheduled in April 2007 that the S & P 500 could lose 40%, then 55% during the collapse from 2007 to 2009

In the end, the more Hussman discovers that the unsustainable conditions of the stock market are revealed, the more investors should be worried. Of course, there may still be returns to be made in this market cycle, but at what point does the increasing risk of an accident become too unbearable?