Jeremy Grantham, the famed investor known for calling market bubbles, has said that the historic collapse in stocks he predicted a year ago is now underway and that the benchmark S&P 500 index could decline by 45% this year.
Grantham, the co-founder of Boston asset manager GMO, describes U.S. stocks as being in a “super bubble,” only the fourth such bubble of the last century. And just as they did in the crash of 1929, the dotcom bust of 2000, and the financial crisis of 2008, he’s certain this bubble will burst, sending indexes back to statistical norms.
Grantham forecasts the S&P 500 will drop 45% to a level of 2,500 this year. The Nasdaq Composite, already down 12% this month, may experience an even bigger correction.
The first sign of trouble Grantham points to came last February, when dozens of the most speculative stocks began falling. One proxy, Cathie Wood’s Ark Innovation ETF (ARKK), has since fallen 52%. Next, the Russell 2000, an index of mid-cap equities that typically outperforms in a bull market, trailed the S&P 500 in 2021.
Finally, there was what Grantham calls the kind of “crazy investor behavior” indicative of a late-stage bubble: meme stocks, a buying frenzy in electric-vehicle stocks, the rise of cryptocurrencies and multimillion-dollar prices for non-fungible tokens (NFTs).
Not only are equities in a super bubble, according to Grantham there’s also a bubble in bonds right now, a bubble in global real estate, and a bubble in commodity prices. Even without a full reversion back to statistical trends, he calculates that losses in the U.S. alone may reach $35 trillion U.S.
Grantham places blame for bubbles of the past 25 years on bad monetary policy. He says the U.S. central bank has “aided and abetted” the formation of successive bubbles by first making money too cheap and then rushing to bail out markets when corrections follow.
Grantham advises selling U.S. equities in favor of stocks trading at cheaper valuations in Japan and emerging markets, owning resources for inflation protection, holding some gold and silver, and raising cash to deploy when prices are once again attractive.
