John Hussman, whose Strategic Growth and Strategic Total Return funds were some of 2008’s best, is warning that major volatility may soon return to the stock market. “I suspect that the markets are about to get volatile, possibly to an extent beyond what we observed in October and November,” Hussman wrote in his latest market commentary on Hussman Funds’ website. “When the markets break support with broad uniformity and few divergences, it suggests that risk aversion is – if anything – becoming more pointed. Along with credit spreads and the exchange value of the U.S. dollar, the CBOE volatility index (VIX) is worth watching, as a push above about 55 may signal another ‘cascade’ to the downside as we saw in October and November.”

Still, Hussman does see good value in the market right now for long-term investors. “As for the stock market as a whole, I continue to view the market as undervalued, but not deeply undervalued,” he writes. “So over the course of a 7-10 year holding period, I do expect passive buy-and-hold investors in the S&P 500 to achieve total returns somewhat above 10% annually. Shorter-term, however, investors may demand much higher prospective long-term returns in order to accept risk, and that’s a problem, because the only way to price stocks to deliver higher long-term returns is to drive prices lower.”