Why a legendary Wall Street permabear is suddenly sounding more upbeat

• John Hussman, an enduringly bearish voice on Wall Street, is adjusting his investment calculus.
• Hussman said the market's best days increasingly come amid "dangerous" conditions.
• Still, the longtime market bear remains cautious with valuations near all-time highs.

It's a rare day when John Hussman, the legendary permabear who called the 2000 and 2008 crashes, expresses a degree of optimism about stocks.

One of those days came this week, however, when Hussman published his monthly market comment.

The president of the Hussman Investment Trust has been consistently bearish throughout the 2010s and 2020s, warning of potential drawdowns of 60% or more. While there have been rough patches for stocks during recent years — like the 35% S&P 500 COVID drawdown and the 25% decline amid the 2022 inflation surge — the market has repeatedly bounced back, posting huge cumulative gains.

Now, the impressive returns appear to have Hussman readjusting his calculus — and his mindset.

Hussman said he expanded his investment parameters by reducing his downside hedges to allow for more upside potential, even during what he deems bubble periods, like today.

"I recently came to the realization that I've been discriminating against the bubble," Hussman wrote in his commentary titled "How I Learned To Love the Bubble (Even Before it Bursts)."

"Yes, we know that speculative bubbles can be filled with delusion, and their eventual collapse can cause a great deal of suffering, so when we see conditions that have inevitably led to that sort of outcome, it's natural to hope for — and look forward to — better investment conditions elsewhere, in the future," he wrote. "But I decided we might be able to do better by finding and cultivating roses here and now, even amid what we are convinced is garbage."

Hussman has often warned over the last few years of "trap door" conditions, where extremely high valuations accompanied by deteriorating investor sentiment made it likely to see sharp downside in the near-term.

Hussman's preferred valuation model — the ratio of the total market cap of non-financial stock to the revenue of those stocks — is near all-time highs, beating peaks reached in 2021, 2000, and 1929.

But, increasingly, the market's best days have come during these periods, he said. Going back to the 1940s, the market's high-return days have come just 2% of the time amid poor conditions. Now, with valuations consistently high since 2020, they've come more frequently, and it's crucial to have exposure to them.

"Because 'trap door' conditions have been more frequent in recent years, these 'roses' appear in close to 15% of weekly periods during most recent 1-, 3-, and 5-year horizons," he wrote. "Yet they easily account for more than half of the S&P 500 total return over these horizons."

While Hussman may be a bit less bearish than he was before, he said not to anticipate a full-blown shift to the bullish side of the aisle.

"For anyone waiting for me to turn bullish as their signal to sell at the bubble highs," he wrote, "I'll gently suggest that the title of this comment may be as much as you can ever hope to get."