Mutual fund owner John Hussman, who made a name for himself when he correctly called the 2008-2009 financial meltdown, says we are now witnessing the same kind of equity valuation bubble that preceded the last two stock drops of 50 percent or more.
For Hussman, founder of the Hussman Funds family, it’s déjà vu all over again when it comes to the current record levels at which the major indices are levitating.
"Internal deterioration has actually been developing since early July, and became measurable in early August," he wrote in his
weekly client commentary.
"As conditions presently stand, the equity market remains vulnerable to the same kind of abrupt air-pocket we observed several weeks ago… It’s just that we presently observe a combination of evidence that has generally been disastrous over time."
Hussman was careful not to mention a timetable or a forecast for the treacherous down market he sees ahead. But he insisted equities are more overvalued than at any point in history except 2000, at more than double their historical norms.
On his check list, he sees credit spreads, market internals, and other features of market action eroding, hinting at a shift toward risk aversion in the face of extreme overvaluation.
Hussman said the recent activity of the Russell 2000 and NYSE Composite indexes versus the S&P 500 and Nasdaq 100 suggest the possibility of major market losses ahead.
When the current expansion of stocks hitting new highs and stocks hitting new lows is factored in along with the aforementioned rich valuations and weak internals, he said the recipe is the same as that which preceded 2000 and 2007 market tops.
“My own view is that stocks are vulnerable to the risk of deep losses over the completion of the present cycle not unlike those it experienced in the two most recent cycles, and are likely to post total returns from present valuations of only about 1.4% annually over the coming decade.”
CNBC reported that long-time stock optimist Jim Paulson, usually the polar opposite to Hussman’s bearish sensibilities, is going cautiously underweight U.S. stocks for 2015.
"There's some really, really strong Wall Street consensus themes right now. And one of them is 'The U.S. is the place to be.' Another one is 'The dollar is only going to go up.' The third one [is] 'Rates can stay lower for longer,'" said Paulson, chief investment strategist at Wells Capital Management. "I kind of think that 2015 might resolve in disappointing every one of those themes. I would tilt against them in portfolios."
USA Today said that another market prognosticator, Dan Chung, CEO and CIO at Alger, predicts investors will more record highs in the U.S. stock market next year, but they should also beware of some sharp drops like mid-October 10 percent fall along the way.
"Investors have been in effect selling all the way up in this market," Chung said, noting the massive net mutual fund outflows from U.S. stock funds the past five years. "That is one of the formulas for why equities can continue to outperform."
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