Despite a summer rally, the US stock market is still an unprecedented “superbubble” that will cause financial “tragedy” for investors when it bursts, according to famed investor Jeremy Grantham.
Grantham, the co-founder of asset management firm GMO in Boston, said the current superbubble is entering its “final act” due to deteriorating economic conditions. A recent “bear market rally” that saw the S&P 500 recoup 58% of its losses from a June low follows the pattern of past stock market crashes in 1929, 1973 and 2000, he added.
“The current superbubble features an unprecedentedly dangerous mix of cross-asset overvaluation (with bonds, housing, and stocks all critically overpriced and now rapidly losing momentum), commodity shock, and Fed hawkishness,” Grantham wrote in a letter to clients dated Wednesday.
“Each cycle is different and unique – but every historical parallel suggests that the worst is yet to come,” he added.
The broad-based S&P 500 hit an intraday low of 3,636.87 in June as investors reacted to the Federal Reserve’s policy tightening in response to decades-high inflation readings. But stocks rallied through mid-August amid optimism that inflation had peaked and the Fed might reverse course.
Fed Chair Jerome Powell dashed those hopes at the central bank’s annual summit in Jackson Hole, Wyoming, last week, when he reiterated that hikes would continue until inflation was under control. The market has closed lower for four consecutive days since Powell’s speech.
Grantham, who predicted in January that the S&P 500 could plunge nearly 50% from its level at the time, noted short-term pressure from food and energy shortages related to the Russia-Ukraine war, ongoing COVID-19 lockdowns in China as well as “one of the greatest fiscal tightenings in history” as the US and other countries ended pandemic-era stimulus programs.
“Previous superbubbles saw a much worse subsequent economic outlook if they combined multiple asset classes: housing and stocks, as in Japan in 1989 or globally in 2006; or if they combined an inflation surge and rate shock with a stock bubble, as in 1973 in the US and elsewhere,” Grantham wrote.
“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 added.
Grantham added that current market conditions are “exactly in line” with historical precedents.
“If history repeats, the play will once again be a Tragedy. We must hope this time for a minor one,” he wrote.