80% Odds of Stock Market Crash Within the Next Year

Fund manager John Hussman has gone public with his prediction that there’s nearly an 80% chance of a second economic downturn over the next year.

In his Weekly Market Comment, he describes how…

“I should have assumed that Wall Street’s tendency toward reckless myopia – ingrained over the past decade – would return at the first sign of even temporary stability. The eagerness of investors to chase prevailing trends, and their unwillingness to concern themselves with predictable longer-term risks, drove a successive series of speculative advances and crashes during the past decade – the dot-com bubble, the tech bubble, the mortgage bubble, the private-equity bubble, and the commodities bubble. And here we are again.”

Hussman refers to the shortsightedness investors have shown in failing to learn from the build up and destruction of now several major asset bubbles. Despite his concerns, the majority of mainstream market prognosticators remain bullish, especially through the month of December.

Here’s more context on how he distinguishes his perspective:

“In my estimation, there is still close to an 80% probability (Bayes’ Rule) that a second market plunge and economic downturn will unfold during the coming year. This is not certainty, but the evidence that we’ve observed in the equity market, labor market, and credit markets to-date is simply much more consistent with the recent advance being a component of a more drawn-out and painful deleveraging cycle. Meanwhile, valuations are clearly unfavorable here, and even under the “typical post-war recovery” scenario, we are observing an increasing number of internal divergences and non-confirmations in market action.”

Hussman’s view recognizes that there’s going to be a period of creative destruction before we see the other side of this downturn, and that the transformation of the economy is likely to be difficult. You can read more details on the policy implications and market climate he perceives in his post on reckless myopia.