Stock market crash: Professor warns of 66% plunge, negative returns in stock market

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A former Professor of Economics and International Finance at the University of Michigan, John Hussman, has warned of looming ‘substantial losses’ in the next 12 years even for a well-diversified investor.

“Oh, man. The unwinding of this bubble is going to be painful”, said John Hussman who is now the president and principal shareholder of Hussman Econometrics Advisors, the investment advisory firm that manages the Hussman Investment Trust.

Hussman’s predictions are based on two factors: Market valuations and Market internals. The way he sees it, long-term returns are steered by valuations, while short-term returns are carried by investor psychology through sentiment and penchant.

Hussman is known for his bearish views for many years, asserting that central banking “quantitative easing” (“QE”) has distorted markets and created a false recovery, and inflated asset prices, which had led to extremely poor investment performance.

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The professor projects that over the next 12 years, there will be a 1.5% return for investors who are 60% in stocks, 30% bonds, and 10% cash.

When all is said and done, Hussman expects the market to drop 66%.

“I continue to expect the S&P 500 Index to lose two-thirds of its value over the completion of the current market cycle,” he said. “That loss would not even breach historical valuation norms, but it would at least bring our estimates of long-term expected S&P 500 returns closer to their historical average, in contrast to the negative 10-12 year prospects we observe at present.”

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Hussman provides the following example to support his prediction.

“For example, investors may very well be willing to pay $100 today in return for an expected $100 cash flow a decade from now,” he said. “Sure, doing so will essentially lock in an expected return of zero, but nothing prevents rabid speculators from driving the price to $110 in the short run. In that case, investors will be thrilled with the current price, but they will simultaneously be locking in negative returns.

Hussman said that the current position of the stock market is reminiscent of the ‘return to normal’ trap in Jean-Paul Rodrigue’s “stages in a bubble” economic model.

The United States has continued to witness one of its worst economic crises in history due to the coronavirus pandemic

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The economy has plunged to a level difficult for economists to tell what happens next. Forecasting an unprecedented and unsteady situation is difficult.

The U.S economy is weakening again and faces renewed threats after a slight decrease in unemployment rate last month. Coronavirus cases are surging. Hiring has slowed down. Government stimulus has run out. With no further federal aid in sight this year, Goldman Sachs has slashed its growth forecast for the current fourth quarter to a 3% annual rate from 6%, ABC reported.

“We have a pretty noxious brew developing with the pandemic intensifying, the lack of any further government stimulus and signs showing that the economy is already slowing pretty significantly,” said Mark Zandi, chief economist at Moody’s Analytics.

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