Hussman Investment Trust on Wall Street ‘FOMO’ and the AI ​​bubble (2024)

The president of the Hussman Investment Trust is no stranger to shouting “crisis” – a fact that could make the bulls crow – but, unfortunately for the bulls, Hussman has been right before. The market veteran correctly called the market crises of 2000 and 2008, and once again sounds the alarm about what the next decade will look like for investors.

However, unlike others of his ilk (Marc Rowan’s Apollo Management and Morgan Stanley, to name a few), Hussman doesn’t place the blame solely on an AI “bubble.” Instead, he is holding to account investors, who, in his view, are piling into stocks with little interest in valuations, motivated solely by fear of missing out.

“Although the S&P 500 and Nasdaq 100 have struggled to match Treasury bill yields for more than two years, investors appear to be developing an unbearable and almost frantic ‘fear of missing out’,” Hussman wrote in a note.. “Many pressures are driving that fear: the recent push to record nominal highs, enthusiasm for an economic ‘soft landing’, an expected ‘pivot’ to lower interest rates and, more recently, euphoria over the prospects for intelligence artificial”.

Soft landing?

Leading economists are increasingly confident that the Fed will be able to successfully maneuver a “soft landing” (Jamie Dimon is a notable departure from the general consensus of 80% confidence in this outcome), while roughly 80% of economists surveyed for him Financial times they said they expected to see rate cuts in 2024; Once again, JPMorgan CEO Dimon is not so convinced about this.

Back to Hussman, who agrees that some of the optimism driving the market is legitimate: AI, for example. This is an area where Dimon and the likes of Mark Cuban are also confident, having ruled out both comparisons to a Dotcom bubble.

In fact, Hussman writes: “It stands to reason that some of our largest investments are related to AI, and so are, but not necessarily, those with the largest market capitalizations. My impression is that the Fed will certainly pivot toward lower rates later this year, although the pivot may be more consistent with the Fed’s aggressive easing during the 2000-2002 and 2007-2009 crashes than with quantitative easing and recent zero interest rate bubble. .”

Because? “I believe current market valuations, whichever metric is chosen, will likely be followed by weak to dismal 10-12 year total returns and deep full-cycle losses,” Hussman writes.

Deja vu

Hussman’s note also points out that investors still buying into the stock market frenzy have no idea if they are buying at the peak or if the stock can still go higher. Overall, Wall Street titans said Fortune last year they were relatively confident in the continued performance of the Magnificent 7 (Tesla, Meta, Alphabet, Amazon, Apple, Microsoft and Nvidia), a group largely credited with gains in the S&P500 in recent years.

But Hussman disagrees, saying that while only time will tell, the current market certainly looks like a peak: “We can’t know the future, but it’s easy to look at history and do the math. “Currently, market conditions have a stronger positive correlation with historical market peaks and a stronger negative correlation with historical market lows than 99.9% of the time throughout history.”

The idea that investors might have accidentally (or deliberately) driven stock prices beyond the realms of valuation viability is not new. Last year, Morgan Stanley’s Mike Wilson wrote that investors had pushed stocks into the “death zone,” a term mountaineers use to refer to altitudes where oxygen is no longer enough to sustain human life for long. an extended period of time.

“Whether by choice or necessity, investors have followed stock prices to dizzying heights once again as liquidity (bottled oxygen) allows them to climb into a region where they know they should not go and cannot live for a long time,” Wilson wrote. according market clock. “They climb in search of the top out of greed, assuming that they will be able to ascend without catastrophic consequences. But over time the oxygen runs out and those who ignore the risks are injured.”

However, Wilson was forced to change his outlook after the market rally continued through the spring and summer of 2023. In July, Wilson wrote in a note according to Bloomberg: “We were wrong. “2023 has been a story of higher valuations amid falling inflation and cost cuts.”

Undeterred, Hussman insists he’s off the hook: “If you’re losing your mind and plagued by the fear of missing out, it may be best to have some passive investment exposure in your portfolio. Investors who want a concentrated position in Big Tech can take a concentrated position in Big Tech. We don’t need to get involved. Our discipline is just our discipline. “We’re not going to abandon it because someone else has FOMO.”