Stock market crash: expert warns of 50 to 70% drop for S&P 500

Others have a more pessimistic view. One such is Count John Hussman, chairman of the Hussman Investment Trust, who predicted the stock market crashes of 2000 and 2008.

In a June 23 note, Hussman shared several charts detailing how the current market, by these measures, rivals at least some of the most extreme bubbles in history.

The first shows Hussman’s preferred valuation measure: the ratio of total non-financial stock market capitalization to non-financial stock gross value added. The ratio is approaching its two highest peaks in 2021 and 1929 and is well above the levels of 2000 and 2008.

Hussman likes this metric because of its ability to predict long-term market returns. Current levels suggest negative annualized absolute returns over the next 12 years for the S&P 500 and annualized returns of -9.8% relative to risk-free 10-year Treasuries over that period.

The second chart shows the only four instances since 1990 when the S&P 500 hit a five-year high when the percentage of NYSE-listed stocks hitting one-year highs was less than 50% and the share of bearish investors was less than 30%, according to data from Investor Intelligence.

Besides today, this combination has only occurred in 2000, 2019 and 2022.

And third, Hussman shared a chart showing elevated risk levels for the S&P 500 when considering valuations and what he calls “market internals,” essentially an analysis of individual stock performance to identify levels of market breadth and gain insight into investors' appetite for risk-taking.

Risk levels are currently as high as they were in 2018 and 2000.

Hussman said all of this made the outlook dire for stocks, especially long-term. But he also warned of a potential market reversal in the near future.

“Barring a dramatic change in the quality of market internals, which are rapidly moving in the wrong direction, any new highs from these levels will likely be minimal,” Hussman said. “In contrast, current extreme valuations imply potential downside risk for the S&P 500 in the range of 50% to 70% over the end of this cycle.”

Hussman's journey and his opinions in context

Of course, these views are well outside the market consensus. Top strategists at major Wall Street banks have been steadily raising their price targets for the S&P 500 this year as the market regularly hits new highs. Most expect the index to remain above 5,000 through the end of 2024.

Advances in AI, a robust job market and falling inflation have made it difficult to bet against the market and changed the minds of many former bears like Morgan Stanley's Mike Wilson and Piper Sandler's Michael Kantrowitz.

But there are still some naysayers. JPMorgan's Marko Kolanovic expects the S&P 500 to fall to 4,200, while more extreme forecasts include Jeremy Grantham's estimate of around 3,000.

For the uninitiated, Hussman has repeatedly made headlines by predicting a decline in stock markets exceeding 60% and forecasting a full decade of negative stock returns. And while the stock market was rising, he persisted in his apocalyptic calls.

But before you dismiss Hussman as a wobbly permanent bear, consider his track record again. Here are the arguments he makes:

• He predicted in March 2000 that technology stocks would plunge 83%, and then the tech-heavy Nasdaq 100 index lost an “improbably accurate” 83% over the period from 2000 to 2002.
• In 2000, he predicted that the S&P 500 would likely experience negative total returns over the next decade, and it did.
• He predicted in April 2007 that the S&P 500 could lose 40%, then 55%, in the subsequent collapse from 2007 to 2009.

However, Hussman's recent returns have been far from exceptional. Its Strategic Growth Fund has fallen about 53% since December 2010 and 11% over the past 12 months. By comparison, the S&P 500 is up about 26% over the past year.

The amount of bearish evidence Hussman has uncovered continues to grow, and his calls for a selloff over the past two years have started to prove accurate in 2022. Yes, there may still be returns to be made in this new bull market, but at what point does the growing risk of a bigger crash become too unbearable?

It's a question investors will have to answer for themselves, and one that Hussman will continue to explore in the meantime.