Hussman Sees 80% Chance That Stock Market Will Plunge in 2010

By Elizabeth Stanton
Dec. 1 (Bloomberg) -- U.S. stocks are likely to plunge again next year as more debt delinquencies cause the equity market to reverse the steepest rally since the Great Depression, investor John P. Hussman said.
The Standard & Poor’s 500 Index has jumped 64 percent since March, when it sank to a 12-year low in March and completed a 57 percent retreat from its October 2007 record. While equities rose after the global recession eased, the Federal Deposit Insurance Corp. said 4.94 percent of loans and leases were overdue at the end of the third quarter, the highest proportion in 26 years that insured institutions have reported data.
"There is still close to an 80 percent probability that a second market plunge and economic downturn will unfold during the coming year," Hussman wrote on his Web site in a posting dated yesterday. Bank earnings and capital ratios "have enjoyed a reprieve in the past couple of quarters, but delinquencies have not, and all evidence points to an acceleration as we move into 2010."
The investor runs the $5.41 billion Hussman Strategic Growth Fund that beat 99 percent of peers in 2008 by losing 9 percent while the S&P 500 tumbled 38 percent. The fund and the
$1.34 billion Hussman Strategic Total Return Fund have returned
8.3 percent and 7.9 percent a year, respectively, since their creation in 2000 and 2002. The S&P 500 has declined since the older fund was founded.
The Federal Reserve helped spur this year’s gains in asset markets by cutting its target rate for overnight loans between banks to almost zero in December. Equities also rose after the pace of credit losses at banks slowed. Worldwide losses and writedowns from the subprime-mortgage crisis total $1.73 trillion, according to data compiled by Bloomberg.
Hussman said the evidence he’s observed in financial markets is "simply much more consistent with the recent advance being a component of a more drawn-out and painful deleveraging cycle."