Investors shouldn’t expect stocks to gain much more than 1.2 percent annually for the next decade because the market is fully valued compared with corporate output, says John Hussman, mutual-fund manager and president of Hussman Investment Trust.

“Whether one believes that economic growth will remain dismal and interest rates will remain low, or that economic growth will accelerate and interest rates will gradually normalize, the inevitable outcome for market returns is likely to be very much the same,” he says in an August 8 blog post. “Years of yield-seeking speculation have already driven stock valuations to levels where prospective 10- to 12-year total returns for the S&P 500 are likely to be no different than the near-zero yields available on Treasury securities.”

The S&P 500 this week reached a record intraday high of 2187.66 for a 7 percent gain since the beginning of the year. But the all-time high is only about 3 percent greater than the July 2015 peak.

Hussman’s forecast is based on a comparison of market capitalization with “gross value added,” or the value of output created across all producers in the economy. The measurement is different from gross domestic product, which doesn’t include final sales that U.S. companies generate in foreign countries.

Unfortunately for stock investors, that 1.2 percent gain won’t come without periods of pullbacks and corrections, or declines of 10 percent of more. In order for the S&P 500 to return to 12-year total returns of 8 percent or more, the market needs to sink by 40 percent to 55 percent, Hussman estimates.

“That’s our primary expectation, largely because I doubt that the global economy will escape a meaningful economic shock in the coming years,” he says.

“Current market conditions couple the third most extreme valuations in history (next to 2000 and 1929, in that order) with extraordinarily high levels of debt (much of it covenant-lite, providing bondholders little defense in the event of bankruptcy),” Hussman says. “My sense is that this will end quite badly, but we don’t need to rely on spectacular outcomes.”

• John Hussman: Expensive Stocks Will Lead to Losses, Paltry Returns
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