Ho hum — a 65% market plunge would be ‘run of the mill,’ fund manager says


While stocks staged a remarkable comeback from Monday’s deep decline, they still closed in the red. A day later, and the sellers are back at it.

Long-suffering market bears, like John Hussman, have to be savoring this kind of action. After all, when things turn south, Hussman’s fortunes turn north.

In fact, riding the street cred he earned form calling market collapses in 2000 and 2008, his assets under management swelled to almost $7 billion. Now, however, after years of underperformance, that figure stands at a fraction of what it once was.

Hussman’s flagship $312-million Strategic Growth Fund












HSGFX, +0.17%










 , which focuses on “the protection of capital during unfavorable market conditions,” has had a rough go of it during this relentless bull market, shedding almost 9% a year, on average, since 2014, according to Morningstar.

But, if his latest call is on point, Hussman figures to be back in the black.

“One might view the very comparison of present stock market conditions to 1929 market peak as exaggerated and preposterous,” he wrote in his latest market commentary. “But then, one would be wrong.”

He explained that current market valuations “match or exceed” those during the 1929 peak, when an 89.2% drop awaited the Dow Jones Industrial Average












DJIA, -1.99%










over the next three years.

“Likewise, valuations for nearly every decile of stocks presently exceed those observed at the 2000 market peak,” Hussman wrote, adding that stocks are pricey enough at these levels to allow for market losses of up to 71% “without even breaching their respective valuation norms.”

He says a 65% retreat would be a “run-of-the-mill” decline. He pointed to this chart of margin-adjusted price-to-earnings, which he says is one of the most reliable valuation measures he’s tested across historic market cycles:



“Current market valuations exceed both the 1929 and 2000 extremes,” he said. “Not surprisingly, we estimate negative returns for the S&P 500 index












SPX, -1.93%










 over the coming 10-12 year period, as valuations suggested in 1929, and as we projected in real-time in 2000.”

Furthermore, Hussman used this chart to illustrate what extreme P/E multiples typically look like once an economic expansion is already mature:



Despite all this, Hussman says he remains fairly neutral on the market at the moment, rather than “hard negative,” as his thoughts may lead you to believe. He’s still looking for the current market cycle to result in a “rather pedestrian” loss of about two-thirds on the S&P, but not quite yet.

“The singular reason for not pounding the table about immediate market losses is that, at the moment, our measures of market internals are sufficiently uniform to indicate an inclination of investors toward speculation,” Hussman explained. “We try to avoid forecasts of when those measures will shift, being instead content to align our views with prevailing conditions as they change over time.”

At last check, the Dow was down over 400 points and the Nasdaq












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 was off by 170 points, fueling the bear fire that began to spark with Monday’s drop. Gold












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 , seen as a haven, was providing a rare splash of green.

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