Based on Federal Reserve Policy and geopolitical risks a stock market crash may be virtually unavoidable. The recent 10 percent declines are a sign that the party is likely over. I think the February correction was a foreshock — and stocks could lose more than 20 to 25 percent of their value by year’s end or sooner.
All this volatility with the VIX [Cboe volatility index] having doubled is very, very disturbing. I am more than concerned with the trade wars and Syria and Trump’s rhetoric toward Russia is an additional source of anxiety.
In a tweet Wednesday, Trump wrote “Russia vows to shoot down any and all missiles fired at Syria. Get ready Russia, because they will be coming, nice and new and ‘smart!'” But on Thursday, he tweeted that a U.S. missile strike on Syria in response to its alleged use of chemical weapons may not be imminent.
Rising interest rates will inevitably put the economy under pressure. Fed rate hike cycles historically lead to recessions and deep market declines. This time is no different because the market is very overvalued.
John Hussman, president of Hussman Investment Trust, who describes himself as an economist and a philanthropist is concerned the stock market shows signs of unraveling on the back of the tech sector’s stumble. Hussman’s claim to fame includes forecasting the market collapses of 2000 and 2007-2008. In his most recent call, he argued that measured “from their highs of early-2018, we presently estimate that the completion of the current cycle will result in market losses on the order of -64% for the S&P 500 index, -57% for the Nasdaq-100 Index, -68% for the Russell 2000 index, and nearly -69% for the Dow Jones Industrial Average.”
He admits the numbers seem extreme but says they are backed up by what he refers to as the “Iron Law of Valuation.” “The higher the price investors pay for a given set of expected future cash flows, the lower the long-term investment returns they should expect. As a result, it’s precisely when past investment returns look most glorious that future investment returns are likely to be most dismal, and vice versa,” he writes. Check out Prepare for the biggest stock-market selloff in months. According to Hussman’s math, from 2009 to 2018, the S&P 500’s price sales ratio jumped from less than 0.7 to a multiple of 2.4 this year, the highest on record. And it’s not just that particular valuation metric that bothers Hussman. He also detects other signs of weakness.
“At present, our measures of market internals remain unfavorable, partly because of deterioration in interest/credit sensitive sectors, as well as tepid participation (the number of individual stocks participating in various market advances), divergent leadership (for example, a large number of stocks simultaneously hitting 52-week highs and lows), and the divergences we observe in an array of other sectors,” he said.
These trends suggest that investors are becoming less willing to take on risk, a bad sign for equities as stocks generally flourish when market participants are willing to make risky bets.
And he warns that the stock market won’t be able to escape this “danger zone” until it shifts to a less dangerous combination of valuations, internals and overextended conditions.
He provides numerous charts on valuations to back up his theory which can be found on his blog.
“The best time to protect money is while you have it.”