In his latest bear market call, finance professor turned portfolio manager John Hussman is warning of market losses on the order of 25% over the next half-year.
“We now have a set of market conditions that is associated almost exclusively with steeply negative outcomes,” writes Hussman (left) in his most recent market commentary called “Warning: Goat Rodeo.” The name derives from Appalachian slang indicating the need for an improbably large number of things to go right in order to walk away unharmed.
In language more technical than most of his commentaries, Hussman explains that what he calls a “whipsaw trap” – a breakdown in market internals followed by a rally led by volatile sectors such as financials – is only rarely (30% of the time) followed by further market advances over the following two months. Hussman warned of a whipsaw trap back in October, and the market has strongly rallied since then, meaning that the market has fallen into that rare 30% recovery zone.
Under those circumstances – characterized by low earnings yields and high financial advisor bullishness – “the result has almost always been hostile,” Hussman says. He calls such market conditions “exhaustion rallies,” which he says are typically followed by “deep losses over the following 6-7 month period.” Exhaustion rallies in 1987 and 2007 saw subsequent losses over the next seven months of 33% and 43%, respectively, in the most extreme cases.
Hussman has garnered the attention of investors in the past for his specific market calls, including his warning to investors in July 2007, before the market began a plunge from which it has yet to recover. Yet the economy and markets have not always cooperated with Hussman’s forecasts. In November, he called “the probability of oncoming recession near 100%.” Preliminary 4th quarter GDP figures showed the economy expanded at an annual rate of 2.8% compared to a 1.8% real rate in the 3rd quarter. Meanwhile, the stock market has gained about 5% since Hussman’s recession call, when he cautioned investors against “trying to reduce risk when a hundred million other investors suddenly become interested in doing the same thing.”
In his current market commentary, Hussman stands by his recession prediction, noting the growth rate of the economy on a year-over-year basis is just 1.6%, a decline that has “always been associated with recession.”
Given this economic weakness, Hussman concludes “it's difficult to understand why Wall Street so completely rejects the likelihood of an economic downturn. Then again, that's exactly why we're expecting a Goat Rodeo.”