[worried trader] * John Hussman — the outspoken investor and former professor who's been predicting a stock collapse — says market participants should think twice if they believe the Federal Reserve will save them from a market crash. * By his calculations, if valuations revert to their historical norm, investors can expect a negative annual return of 5.18% over the next decade. * Hussman says it's likely that this cycle will end with "market losses on the order of two-thirds of value of the S&P 500." * Click here for more BI Prime stories. The bull market that started back in March 2009 has shrugged its proverbial shoulders at just about anything that was thrown at it: a polarizing US election, a Greek bailout, the prospects of nuclear war, an impeachment, a trade war, Brexit, declining earnings — you name it. But if there's one person that thinks a market crash of epic proportions is long overdue, it's John Hussman, the former economics professor who is now president of the Hussman Investment Trust. "The more glorious this bubble becomes in hindsight, the more dismal future investment returns become in foresight," he penned in a recent client note. "At the market open of Friday, January 24, our estimate of likely 12-year nominal total returns for a conventional passive investment portfolio (60% S&P 500, 30% Treasury bonds, 10% Treasury bills) fell to just 0.04% annually, below even the previous record of 0.34% set in August 1929." The chart below shows his proprietary estimated 12-year annual total return for a conventional portfolio (60% stocks, 30% bonds, 10% cash — blue line) compared against the actual subsequent 12-year returns for that portfolio (red line). [Hussman] According to Hussman, market valuations are churning about three times higher than their historical norm. If they stay at this permanently high level forever, he says that investors can expect a 5.6% S&P 500 return annually over the next ten years. If valuations move to double their historical norm, it gets worse. He says the implied return investors should expect is 1.48% annually. But what if valuations revert to their historical averages? Allow him to explain: "More likely, assuming that market valuations simply touch their run-of-the-mill historical norms in the future, passive investors should be braced for zero or negative total returns both in the S&P 500 and in a conventional 60/30/10 asset mix over the coming 10-12 year horizon," he said. The way Hussman sees it, a negative 5.18% return annually over the next 10 years is "more likely." Market optimists may look at this forecast and note that the Fed has made it explicitly clear that they will cut rates in order to prolong the economic expansion. And lower rates, all else equal, should provide a boon to equities. Hussman says no dice. To him, it all comes down to market internals — and right now, they're flashing red. "In contrast, stocks have languished or lost value in periods when market internals were unfavorable – regardless of whether the Fed was easing or tightening," he said. "Put another way, in market cycles across history, including the most recent one, the dominant consideration for stocks has been condition of market internals themselves, not the condition of monetary policy per se." He continued: "Presently, we observe the combination of hypervaluation and negative market internals, which I view as a 'trap door' situation." Below is Hussman's proprietary measure of market internals (red line) juxtaposed against the S&P 500's cumulative total return (blue line). [Hussman] "Notably, the Fed eased relentlessly throughout both the 2000-2002 and 2007-2009 market collapses," he said. "But when investors are inclined toward risk-aversion, safe liquidity is a desirable asset, not an inferior one, so creating more of the stuff doesn't encourage speculation." Hussman continued: "What concerns me is that many investors seem have drawn the 'lesson' that valuations don't matter, that the Fed is omnipotent, and that stocks are always an 'investment,' regardless of the price. That's a lesson that I suspect investors are going to re-learn the hard way over the completion of this cycle." With all of that under consideration, Hussman relays a stark prognostication for market participants moving forward. "If you want my opinion, that opinion is that current hypervalued extremes are likely to be followed by market losses on the order of two-thirds of value of the S&P 500, with negative S&P 500 nominal total returns on both a 10-year and a 12-year horizon," he concluded. HUSSMAN'S TRACK RECORD For the uninitiated, Hussman has repeatedly made headlines by predicting a stock-market decline exceeding 60% and forecasting a full decade of negative equity returns. And as the stock market has continued to grind mostly higher, he's persisted with his calls, undeterred. But before you dismiss Hussman as a wonky perma-bear, consider his track record, which he broke down in his latest blog post. Here are the arguments he lays out: Predicted in March 2000 that tech stocks would plunge 83%, then the tech-heavy Nasdaq 100 index lost an "improbably precise" 83% during a period from 2000 to 2002 * Predicted in 2000 that the S&P 500 would likely see negative total returns over the following decade, which it did * Predicted in April 2007 that the S&P 500 could lose 40%, then it lost 55% in the subsequent collapse from 2007 to 2009 In the end, the more evidence Hussman unearths around the stock market's unsustainable conditions, the more worried investors should get. Sure, there may still be returns to be realized in this market cycle, but at what point does the mounting risk of a crash become too unbearable? That's a question investors will have to answer themselves — and one that Hussman will clearly keep exploring in the interim. SEE ALSO: 'WE'RE DEFINITELY IN A BUBBLE': A HEDGE-FUND CHIEF OVERSEEING $2 BILLION EXPLAINS WHY HE SEES A 40-60% CRASH LOOMING — AND A LOST DECADE AHEAD FOR STOCKS Join the conversation about this story » NOW WATCH: A big-money investor in juggernauts like Facebook and Netflix breaks down the '3rd wave' firms that are leading the next round of tech disruption
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