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Legendary investor Jeremy Grantham predicts S&P 500 will crash 50% after 4th US 'superbubble' in the past century pops

Markets Insider
Markets Insider
 2022-01-20

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Jeremy Grantham, co-founder of the Boston-based investment firm GMO, in September 2018.
  • Jeremy Grantham foresees the S&P 500 crashing almost 50% after the fourth "superbubble" the US has ever seen bursts.
  • He laid out the reasons why he is confident the latest one will pop, just as its predecessors did in 1929, 2000, and 2008.
  • "This checklist for a superbubble running through its phases is now complete and the wild rumpus can begin at any time," he said.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell .

Jeremy Grantham, the legendary investor who has predicted the last three market bubbles, foresees the S&P 500 crashing almost 50% after the fourth "superbubble" the US has ever seen bursts — even with multiple efforts underway to prevent it.

The market historian, who has repeatedly warned investors they're caught in a historic bubble, said the benchmark index may slip to around 2,500 —  a downside of roughly 44% from Thursday's close and 48% from January's peak. The tech-heavy Nasdaq Composite, meanwhile, might see a sharper downturn, he added.

"This time last year it looked like we might have a standard bubble with resulting standard pain for the economy," Grantham said in a note published Thursday on the website of his Boston-based asset management firm, GMO. "But during the year, the bubble advanced to the category of superbubble, one of only three in modern times in US equities, and the potential pain has increased accordingly."

What made the bubble worse, according to the investor, is how it's been accompanied by extremely low interest rates and high bond prices as well as a bubble in housing and an "incipient bubble" in commodities.

In roughly 4,000 words, Grantham laid out the reasons why he is confident the latest "superbubble" will pop, just as its predecessors did in 1929, 2000, and 2008.

For example, he noted the bull market's acceleration in 2020 up until February 2021, when the Nasdaq rose an astonishing 58% from 2019.

He also touched on an occurrence that happened in 1929 and 2000 that is replaying today: the underperformance of speculative stocks as the blue chips rise.

And the "touchy-feely characteristic of crazy investor behavior" is indicative of a late-stage bubble, the 83-year-old added. Last year saw the rapid ascent of meme stocks such as GameStop and AMC in addition to cryptocurrencies like dogecoin as well as non-fungible tokens.

"This checklist for a superbubble running through its phases is now complete and the wild rumpus can begin at any time," he said. "When pessimism returns to markets, we face the largest potential markdown of perceived wealth in US history."

He compared this bubble to Japan in the 1980s, which saw two asset bubbles — real estate and stocks — together. The US, in contrast, has three and a half major asset classes — stocks, bonds, real estate, and commodities — bubbling simultaneously for the first time.

"And if valuations across all of these asset classes return even two-thirds of the way back to historical norms, total wealth losses will be on the order of $35 trillion in the US alone," he said.

His advice to investors?

Avoid US equities, invest in value stocks of emerging markets and several cheaper developed countries such as Japan. Plus, have some cash for flexibility, as well as a little gold and silver.

And as for crypto, that asset class leaves him "increasingly feeling like the boy watching the naked emperor passing in procession," he said.

Read the original article on Business Insider

Comments / 51

SurfsUp
01-21

Jim Cramer just said he thinks we have already hit bottom. But I agree with this guy that there is quite a lot more to fall and it will.

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20
Rob M
01-21

All of these big investors want it to crash so they can get richer and we can lose our pension funds.

Reply
16
thefuss
01-21

All that means is, when it happens there will be an incredible buying opportunity for many

Reply(2)
22

Comments / 0