Hussman: October decline a mild warning shot

Last week, the S&P 500 rose 2.4 percent, rebounding after recent declines and sending it back into positive territory for 2018.

However, John Hussman does not think the worst is over. In his latest article, he wrote: “Let’s be clear. October’s market decline was a rather mild warning shot.”

“The advance of recent years has produced a toxic combination of extreme valuations in every conventional asset class, coupled with a breathtaking mountain of low-grade debt issued by Wall Street...to satisfy the yield-seeking speculative demand of investors,” he said.

For US stocks in particular, Hussman said that valuations based on “our Margin-Adjusted CAPE, which is substantially better correlated with actual subsequent market returns than Robert Shiller’s raw cyclically-adjusted P/E...have retreated only to the level they reached in November 2017, matched in history only by the 3 weeks surrounding the 1929 market peak”.

While valuations are informative about long-term returns but less so about short term trends, Hussman also noted that market internals, a measure of investor inclination towards speculation or risk-aversion, “shifted to a negative condition on February 2, and have remained unfavorable since then”.

“Presently, neither valuations nor internals are favorable, and that is what opens up a trap door under the market,” he said.

“Over the completion of the current market cycle, I fully expect the S&P 500 to lose close to two-thirds of its value from the recent peak,” he warned.