Stock markets have fallen by more than 23% this year, experiencing their worst decline since 2008, when panic broke out in the markets in connection with the collapse of Lehman Brothers. But this bear market is far from over, according to stock analyst John Hussman, who has made several successful crash predictions.

According to Hussman, president of the Hussman Investment Trust, who predicted the 2000 and 2008 crashes, the most reliable valuation measures for predicting future returns are still around the levels seen during the dot-com bubble more than two decades ago. This is problematic for investors for several reasons:

• First, interest rates are rising rapidly as inflation remains high and the Federal Reserve tightens monetary policy at the most aggressive pace since 1994. That means increased competition for risky assets like stocks - competition that hasn't been there in more than a decade. (Why invest in volatile stocks when you can get a risk-free 4% return on a 10-year Treasury bond?) In general, falling bond yields since the Great Financial Crisis mean investors are more willing to accept higher stock valuations. Now that yields are becoming more attractive, the willingness to accept higher valuations is declining.
• Second, Hussman says his own measure of "market internals" is currently unfavorable. In other words, investors are currently scared and less willing to take risks. According to recent surveys by the American Association of Individual Investors, investors still have a 64.5% allocation to stocks in their portfolios, despite high valuations and rising returns. Hussman said that's above average, pointing out that at the bottom of the market in 1990, 2002 and 2009, that level was 40%.

https://twitter.com/hussmanjp/status/1577345110760734724

"This time around, I expect between 50-70% - being through several periods of decline and even free-fall, punctuated by fast, furious 'cleansing rallies' that offer hope all the way down," Hussman said.

Hussman warned of extreme valuations and the need for a correction as far back as August 2021, a few weeks before the S&P 500 index hit its peak. In his August commentary, he mentions that many investors start to think stocks can't go the other way during a bull market as well. A notable feature of extended bull markets is that investors begin to believe - despite extreme valuations - that the world has changed in a way that makes steep market losses and long periods of poor returns impossible. Among all the bubbles in history, including the bubble of 1929, the Go-Go bubble of the late 1960s, the Nifty-Fifty mania of the early 1970s, the tech bubble of the late 1990s, and the mortgage bubble of 2007 that preceded the global financial crisis, none so thoroughly fed the illusion that prolonged losses were impossible than the bubble we are in today.

Hussman's past successes

John Hussman is president and principal shareholder of Hussman Strategic Advisors, an investment advisory firm that manages the Hussman Funds. He is also president of the Hussman Investment Trust. Hussman manages the Hussman Strategic Growth Fund, which invests primarily in U.S. stocks, and the Hussman Strategic Total Return Fund, which invests primarily in U.S. Treasury and government agency securities.

Hussman repeatedly made headlines when he predicted a stock market decline of more than 60% in 2000 and predicted an entire decade of negative stock returns. But before you dismiss Hussman as a weirdo perma-bear, reconsider his track record. Here are his predictions:

• In March 2000, he predicted that technology stocks would fall 83%, whereupon the Nasdaq 100 index, which is based on technology firms, lost an "improbably accurate" 83% between 2000 and 2002.
• In 2000, he predicted that the S&P 500 index would likely have negative total returns over the next decade, which it did.
• In April 2007, he predicted that the S&P 500 would lose 40%, whereupon it lost 55% during the subsequent downturn from 2007 to 2009.

Hussman's recent returns, however, have been less than stellar. His Strategic Growth Fund has offered an average annual return of -3.49% over the past 10 years. By comparison, an ETF replicating the S&P 500 index has delivered an average annual appreciation of 12.06% over the same period. While the fund has averaged a loss over the past 10 years, it has risen 9% over the past 12 months. Again, by comparison, the S&P 500 index is down 16.5% over the past year.

The amount of bearish evidence that Hussman is discovering continues to mount, and his calls over the past few years for a significant sell-off are proving accurate so far. But only the future will tell if his prediction will come true this time around.

DISCLAIMER: All information presented here is for informational purposes only and is in no way an investment recommendation. Always do your own analysis.