EDITOR NOTE: When permabears give advice, we tend to temper it by raising the forecast up a few points. The author below, a prominent economics professor and manager, tells us that the market is about to plummet -66%. Given the uncertainties facing the global economy amid the pandemic, it’s hard to tell whether we should temper or add to this figure. Actually, it doesn’t matter. The wise thing to do at this point would be to hedge. And gold is the best hedge for all economic uncertainties.
According to John Hussman — the former economics professor turned president of the Hussman Investment Trust who's known for his persistently bearish views — the return prospects for a well-diversified investor have never been worse.
Hussman's thinking can be boiled down to two distinct buckets: market valuations and market internals.
Over the next 12 years, Hussman is projecting a -1.56% return for investors who are 60% in stocks, 30% bonds, and 10% cash.
When all is said and done, Hussman expects the market to drop 66%.
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"Oh, man. The unwinding of this bubble is going to be painful."
That's what John Hussman — the former economics professor turned president of the Hussman Investment Trust who's known for his persistently bearish views — said in a recent client note in reference to today's stock market.
"I continue to expect the S&P 500 Index to lose two-thirds of its value over the completion of the current market cycle," he said. "That loss would not even breach historical valuation norms, but it would at least bring our estimates of long-term expected S&P 500 returns closer to their historical average, in contrast to the negative 10-12 year prospects we observe at present."
The reasoning behind Hussman's call can be distilled into two distinct portions: market valuations and market internals. The way he sees it, long-term returns are steered by valuations, while short-term returns are carried by investor psychology through sentiment and penchant.
Hussman provides the following example to demonstrate his thinking.
"For example, investors may very well be willing to pay $100 today in return for an expected $100 cash flow a decade from now," he said. "Sure, doing so will essentially lock in an expected return of zero, but nothing prevents rabid speculators from driving the price to $110 in the short run. In that case, investors will be thrilled with the current price, but they will simultaneously be locking in negative…
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