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The S&P 500 could plummet as much as 70% this cycle if markets encounter a ‘mother lode’ of FOMO extremes, says famed fund manager

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  • Legendary investor John Hussman says the latest stock rally is rooted in the extreme fear of missing out.

  • FOMO factors have spiked in the markets and stock prices could fall 50% to 70% this cycle.

  • His company’s most reliable indicator now exceeds the 1929 extremes.

Record highs in the stock market give the impression of a runaway rally, but it’s a bull run that will eventually collapse, John Hussman said in a new note.

The legendary bear, famous for predicting the crashes of 2000 and 2008, reiterated that stocks could fall as much as 70% this cycle. It’s a long-held view that may seem out of place amid the market’s momentum as the S&P 500 continues to break record highs in 2024.

But according to the president of the Hussman Investment Trust, the extreme run-up is driven by investor impatience and fear of missing out – key ingredients for a coming correction.

“There are certain characteristics of valuation, investor psychology and price behavior that emerge when the fear of missing out becomes particularly extreme and the focus of speculation becomes particularly narrow. Last Friday we encountered a new ‘mother lode’ of these circumstances,” he wrote on Tuesday.

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He said a combination of red flag factors include overvaluations, divergence between individual stock sectors and skewed sentiment. Another area of ​​caution is that the growing group of stocks is hitting a new 52-week low, even as the indexes themselves are surging.

“I continue to view the market rally of the past few months as an attempt to ‘grab the froth of yesterday’s bubble,’ rather than as a new, sustained bull market advance,” he said. “I also believe that the S&P 500 could lose something on the order of 50-70% during the completion of this cycle, simply to return expected long-term returns to the prevailing norms that investors associate with stocks.”

Hussman is one of the most bearish forecasters on Wall Street and has been repeating for months his view that stocks could fall more than 60%.

Most strategists at the major Wall Street banks, meanwhile, expect the S&P to remain above 5,000 through 2024.

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This is partly because the macroeconomic outlook has improved compared to the first half of 2023, when a recession was the base case for most economists.

Hussman has made headlines by predicting a massive stock market decline and predicting an entire decade of negative stock returns, and as the stock market has continued to climb higher, he has persisted in his call for a painful correction on the horizon.

In Tuesday’s note, he also noted that his firm’s most reliable measure — the ratio of nonfinancial market capitalization to corporate gross value added — now exceeds the extremes of 1929, when the Dow Jones fell from peak to trough by 89% dropped.

“Even the more conventional (but less reliable) S&P 500 price-to-expected operating earnings ratio is at levels unrivaled except around the 2000 and 2022 peaks,” Hussman said. “Simply put, my impression is that the period since early 2022 includes the extended peak of one of the three great speculative bubbles in US history.”

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Read the original article on Business Insider

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