JAN 30, 2018
Let’s not overcomplicate or bury the lead here. John Hussman is very good at his job. And this is what he says, point blank: “I expect the S&P 500 to lose approximately two-thirds of its value over the completion of this market cycle.”
Last week, the U.S. equity market climbed to the steepest valuation level in history, based on the valuation measures most highly correlated with actual subsequent S&P 500 10-12 year total returns, across a century of market cycles. These measures include the S&P 500 price/revenue ratio, the Margin-Adjusted CAPE (our more reliable variant of Robert Shiller’s cyclically-adjusted P/E), and MarketCap/GVA – the ratio of nonfinancial market capitalization to corporate gross value-added, including estimated foreign revenues – which is easily the most reliable valuation measure we’ve ever created or tested, among scores of alternatives.
The chart below shows the ratio of MarketCap/GVA, which now stands beyond even the 2000 market extreme.
If a 67% drop in equity prices isn’t a dire enough shot across the bow, Hussman also predicts the S&P, in total, to lose value in real terms over the course of the next 12 years.