Portfolio manager John Hussman, whose bear market warnings have been snubbed by a market up nearly 10% this year and 24% since October lows, has stepped up his prophecy of doom, saying present conditions put this market in the most negative 1.5% of historical periods in which to invest.
In his latest missive to investors on Monday, the former finance professor and manager of the eponymous fund family elaborates on an attention-getting comment last week warning that the same market conditions that led to massive market crashes in 1987, 2000 and 2007 prevail today. An article in this week’s Barron’s approvingly cites Hussman’s analysis that we are currently in a “who’s who of awful times to invest” and advocates assuming a defensive posture in today’s market.
The key conditions that Hussman (left) associates with markets about to crash are an S&P 500 trading sharply above its 52-week moving average and more than 50% above its four-year low; a “Shiller P/E” well above 18; a 10-year Treasury well above levels reached six months ago; and high bullishness and low bearishness among investment advisors. Those top-of-the-roller coaster historical periods led to immediate sell-offs of about 10% or even higher, followed by plunges of some 50% thereafter in 2000-2002, for instance, or in 2007-2009. Hussman was on record calling that last market drop in July 2007.
In Monday’s letter, Hussman acknowledges that stock prices may move higher in the short-term, but given the probabilities associated with current market conditions, owning stocks in this market is akin to gambling based on nothing more than a lucky feeling: “What keeps slot machines spinning all around the world is the hope–despite the predictably and reliably negative average return/risk tradeoff–that this time will be different, and this spin will work out,” Hussman writes.
The Ph.D. portfolio manager adds corporate insider selling as another ominous sign on top of his list of historic indicators of a crash, noting that the ratio of corporate stock sales to stock buys have been running 8 to 1, four times the normal pace; he cites TrimTabs data that the pace is even more skewed in dollar terms, at $13 in insider sales for every $1 of purchases.
Concludes Hussman: “The narrow syndrome of conditions we observe today mirrors what we observed at the 2000 peak and the 2007 peak, and very few times in-between …” In discussing the economy, Hussman stands by a recession call he made in November, saying “we would expect to see a clear deterioration in observable economic variables over the next 8-12 weeks.”