A notorious market bear who called the 2000 and 2008 crashes shares 2 charts showing the US economy is on the threshold of recession — and warns of 70% potential downside for the S&P 500

• John Hussman says the US economy could be on the brink of recession.
• He highlights manufacturing output versus demand and labor market indicators.
• Whether or not a recession occurs, he said current stock valuations likely mean poor returns ahead.

There's been plenty of talk about recession indicators over the last couple of years.

The Sahm Rule is in the hot seat after it triggered in early August. There's also the Treasury yield curve, which officially inverted in early 2023. And The Conference Board's Leading Economic Index. All of them have perfect track records and signal trouble ahead for the US economy.

On Thursday, John Hussman, the president of the Hussman Investment Trust who called the 2000 and 2008 stock market crashes, added two more indicators to the mix that show "economic conditions hovering at the threshold of recession."

The first is a composite index measuring manufacturing output against business demand. When orders for goods outpace manufacturing output, it's a sign of a healthy economy. At the moment, the ratio is floating right around zero. The only times it has dipped into negative territory have been during the last eight recessions.

The second indicator examines the labor market and compiles 10 employment gauges, including the aforementioned Sahm Rule, growth in new and continuing unemployment claims, the 6-month change in the number of hours worked, and more.

The index sits right at five, a level reached only during the last six recessions.

While Hussman said there is not enough evidence yet to declare a recession, he also doubts that incoming rate cuts will substantially help the economy avoid a downturn.

The same goes for rate cuts' impact on stocks. Hussman's proprietary gauge of "market internals," essentially investor sentiment measured by market breadth, signals a weak investor outlook at the moment. When that's the case, even when the Fed is easing, stocks have performed poorly, as shown by the orange line below.

Outside the macro picture, Hussman also sees poor returns for stocks in the coming decade simply based on current valuation levels.

His preferred metric is the total market cap of non-financial stocks-to-total value added of those stocks. It's at its highest-ever level, exceeding peaks in 1929, 2000, 2008, and 2022.

This suggests the S&P 500 will average negative yearly returns over the next 12 years, Hussman has warned, and implies that the market would have to drop significantly to get back to levels where one could expect 10% annualized returns over the following 12 years.

"At present, that potential loss (not a forecast) is about -70%," Hussman wrote in a note on Thursday. "In practice, these losses often emerged in the first three years following a valuation extreme, but it's essential to understand that valuations are not timing tools and can remain elevated for extended periods of time (which is why market internals are important as well)."

Hussman's track record — and his views in context

Recession risks have come more into focus over the last month following the Sahm Rule triggering and the large negative payroll revisions for March 2023-March 2024 released last week by the Bureau of Labor Statistics.

The Federal Reserve itself seems wary about the prospect of a downturn, with Chairman Jerome Powell signaling last week that the central bank would start easing policy.

"The time has come for policy to adjust," Powell said in a speech in Jackson Hole, Wyoming. "It seems unlikely that the labor market will be a source of elevated inflationary pressures anytime soon. We do not seek or welcome further cooling in labor market conditions."

With the unemployment rate steadily rising, it's unclear if the Fed will be able to stop any "further cooling" with rate cuts.

With stocks at all-time highs, investors seem confident that a soft landing can be achieved. While some strategists see a minor pullback coming in the remainder of the year, Hussman's view on potential downside is an outlier among major strategists.

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 ground mostly higher, he persisted with his doomsday calls.

But before you dismiss Hussman as a wonky perma-bear, consider again his track record. Here are the arguments he's laid out:

• He 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.
• He predicted in 2000 that the S&P 500 would likely see negative total returns over the following decade, which it did.
• He predicted in April 2007 that the S&P 500 could lose 40%, then it lost 55% in the subsequent collapse from 2007 to 2009.

However, Hussman's recent returns have been less than stellar. His Strategic Growth Fund is down about 54% since December 2010, and has fallen 13% in the last 12 months. The S&P 500, by comparison, is up about 25% over the past year.

The amount of bearish evidence being unearthed by Hussman continues to mount, and his calls over the last couple of years for a substantial sell-off began to prove accurate in 2022. Yes, there may still be returns to be realized in this new bull market, but at what point does the mounting risk of a larger crash become too unbearable?

That's a question investors will have to answer themselves — and one that Hussman will keep exploring in the interim.