One of the market's most outspoken bears is getting destroyed as he waits for a crash
- John Hussman has repeatedly warned the US stock market is due to plunge more than 60%, citing historically high valuations he sees as unsustainable.
- As Hussman has waited for that market reckoning to transpire, his funds have taken a beating relative to benchmarks.
Being a market contrarian can be a lonely existence. It can also be a costly one.
At least that's what stock perma-bear John Hussman has found over the past year and counting.
The former economics professor and current president of the Hussman Investment Trust has made a name for himself by repeatedly calling for a stock market decline exceeding 60%, and forecasting a full decade of negative equity returns. Those bearish prognostications proceeded to hang awkwardly in the air as major US equity indexes repeatedly hit new record highs for much of 2017 and into 2018.
Even when US stocks experienced their first 10% correction in years earlier in February, the pain was short-lived, and they've almost recovered their entire loss in roughly a month's time. The drop ultimately proved to be a far cry from the 67% S&P 500 plunge Hussman floated as recently as late January.
Still, Hussman organized his portfolio in preparation for the market meltdown he was forecasting, for better or for worse. Unfortunately and perhaps unsurprisingly for him, 2017 was a tough time.
Here's a breakdown of how Hussman's funds did in 2017, relative to their benchmarks:
- Strategic Growth Fund: -12.72%, versus S&P 500 (+19.42%) and Russell 2000 (+13.14%)
- Strategic Total Return Fund: +1.21%, versus Bloomberg Barclays U.S. Aggregate Bond Index (+3.54%)
- Strategic International Fund: +1.34%, versus the MSCI EAFE Index (+25.03%)
- Strategic Value Fund: -2.80%, versus S&P 500 (+19.42%)
Reading through Hussman's semi-annual report, it's clear he's totally fine absorbing these market-trailing returns. His view US stocks are overvalued to an unprecedented degree informs his stubborn insistence that a reckoning is looming. And Hussman's portfolio positioning is a "defensive response" to this.
As such, Hussman has set up his holdings so he's protected on a relative basis, should a catastrophic stock-market shock transpire.
"Recall that the S&P 500 registered negative total returns for a buy-and-hold strategy during the nearly 12-year period from March 2000 until November 2011," he wrote in the report. "I expect a similar consequence to emerge from current extremes."
Meanwhile, firms across Wall Street have been moving in the other direction, especially now the aforementioned market correction has made stock valuations more palatable. They've also been emboldened by upward revisions to corporate earnings forecasts, stemming from the GOP tax law.
In the end, it's possible for both Hussman and market bulls to be correct - just on differing timelines. If the economy keeps chugging along and earnings growth stays robust, it's possible bullish investors will continue talking themselves into current valuations for the foreseeable future, much to Hussman's chagrin.
However, Hussman's current description of his portfolio gives the impression he'll be able to make up for the losses he's incurring right now if/when a huge market drop does happen. Only time will tell.
