The stock market has been on an impressive run, with the S&P 500 reaching record highs in 2024. However, legendary investor John Hussman warns that this surge is rooted in an extreme fear of missing out (FOMO) and predicts a significant downturn ahead.
FOMO Driving the Market
John Hussman, renowned for predicting the 2000 and 2008 market crashes, believes that the recent stock rally is unsustainable. He argues that the current bull market is driven by investors’ impatience and a fear of missing out, rather than solid fundamentals. This, he suggests, is a recipe for a major correction.
Hussman points to a “motherlode” of warning signs, including overextended valuations, discrepancies among stock sectors, and a growing number of stocks hitting 52-week lows even as the overall market climbs. These red flags, according to Hussman, indicate that the market is in a precarious position.
Predictions of a Major Decline
Hussman predicts that the S&P 500 could fall by 50-70% in the current market cycle. He explains that this significant drop would be necessary to bring long-term expected returns back to normal levels. Despite the market’s recent highs, Hussman views the surge as an attempt to recapture the highs of past bubbles rather than a sustainable growth trend.
Hussman’s bearish outlook contrasts sharply with the more optimistic views of many Wall Street strategists, who generally expect the S&P 500 to remain above 5,000 through 2024. This optimism is partly fueled by a brighter macroeconomic outlook compared to early 2023, when a recession seemed imminent.
Historical Context and Current Measures
In his recent note, Hussman highlights that his firm’s most reliable measure of market valuation—the ratio of nonfinancial market capitalization to corporate gross value-added—exceeds levels seen in 1929, just before the Dow’s historic 89% plunge. He also points out that the S&P 500’s price-to-forward operating earnings multiple is at levels only matched by the peaks of 2000 and 2022.
Hussman sees the period since early 2022 as part of an extended peak of one of the three greatest speculative bubbles in U.S. history. This perspective underscores his belief that the market is due for a painful correction.
Verdict
While the stock market continues to break records, John Hussman’s warning serves as a stark reminder of the potential risks ahead. His prediction of a 50-70% drop in the S&P 500 highlights the importance of cautious and informed investing, especially in a market driven by fear of missing out and speculative behavior. As history has shown, extreme market conditions often lead to significant corrections, and investors should be prepared for all possible outcomes.
