Jeremy Grantham warned the stock-market superbubble is entering its final phase, set for an “epic finale.”
The veteran investor dismissed the recent rebound in stocks as a classic bear-market rally.
Grantham earlier warned stocks could crash around 50% — but said the outlook has become much darker.
Veteran investor Jeremy Grantham has warned that the current “superbubble” in stocks and other assets looks as though it’s entering its final stages.
Grantham — who cofounded investment firm GMO and is credited with having predicted the 2008 crash — said in a note to clients on Wednesday that the recent rebound in stocks was a false dawn. And he said markets are likely set for an “epic finale”, in which assets from equities to property crash in value.
He warned in January that the “fourth superbubble of the last hundred years” was about to implode. At the same time, he predicted the S&P 500 would drop by almost 50% from its January peak.
US stocks have fallen sharply since that warning, with the S&P 500 down more than 20% from its January high at one point in June. However, they have since recovered somewhat, as investors bet the Federal Reserve will let up on its interest-rate hikes as the economy slows.
Yet Grantham said Wednesday that the recent rise in stocks was a classic “bear-market rally”, which has been a hallmark of major market crashes in the past. It was often the third stage before the fourth and final one, when markets collapse, he added.
“Prepare for an epic finale,” Grantham said. “If history repeats, the play will once again be a Tragedy.”
In January, the investor said he thought the S&P 500 could plunge to 2,500 — more than 35% below Wednesday’s closing price of 3,955. But in his latest note, he said stocks are not the only assets under threat.
“The current superbubble features the most dangerous mix of these factors in modern times: all three major asset classes – housing, stocks, and bonds – were critically historically overvalued at the end of last year,” he said.
“Now we are seeing an inflation surge and rate shock as in the early 1970s as well. And to make matters worse, we have a commodity and energy surge (as painfully seen in 1972 and in 2007), and these commodity shocks have always cast a long growth-suppressing shadow.”
Many investors have said the recent rebound in stocks was unreliable, but few are as pessimistic as Grantham.
Wells Fargo said in a note this week that stocks could fall around 9% back to their June lows, but said they expect the S&P 500 to close the year at between 3,800 and 4,000.
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