One of Wall Street’s most famous investors has predicted that the U.S. stock market remains in a “superbubble,” and warned of a “tragedy” when it pops, according to a publicly filed research note Wednesday.
Jeremy Grantham, who previously predicted Japan’s 1980s asset bubble, the 1990’s dot-com bubble and the housing crisis preceding the 2008 recession, said he believed the current superbubble was going to pop amidst deteriorating economic “fundamentals,” according to Fortune. The comments came on the same day that Mike Wilson, chief U.S. Equity strategist at Morgan Stanley, predicted stock indexes would decrease around 15% once investors realized they were too optimistic, in an interview with Bloomberg Markets. (RELATED: Businesses Make More Cuts In August, Signaling An Increasingly Weakening Economy)
“The U.S. stock market remains very expensive and an increase in inflation like the one this year has always hurt multiples, although more slowly than normal this time,” said Grantham in a research note. “But now the fundamentals have also started to deteriorate enormously and surprisingly: between COVID in China, war in Europe, food and energy crises, record fiscal tightening, and more, the outlook is far grimmer than could have been foreseen in January.”
The current superbubble features a dangerous mix of cross-asset overvaluation, commodity shock, and Fed hawkishness. Each cycle is different – but every historical parallel suggests the worst is yet to come. Read Jeremy Grantham’s latest Viewpoint. https://t.co/FccdD0JVHg pic.twitter.com/b6nkxSS7Wd
— GMO (@GMOInsights) August 31, 2022
Grantham, in his note, outlined a four-stage process by which a superbubble could be expected to pop.
First, the bubble occurs as a result of investor optimism, followed secondly by a setback caused by an economic or political surprise that causes investors to get skittish. The third step is where Grantham predicts the market is currently, a rally within the bubble, as investors hold out hope for improved conditions.
“Investors surmise, this stock sold for $100 6 months ago, so now at $50, or $60, or $70, it must be cheap,” Grantham writes. “Outside of the late stage of a superbubble, new highs are slow and nervous as investors realize that no one has ever bought this stock at this price before: so it is four steps forward, three steps back, gingerly exploring terra incognita. Bear market rallies are the opposite: it sold at $100 before, maybe it could sell at $100 again.”
Finally, Grantham predicts, the market’s fundamentals fall apart and a crash occurs. He notes a growing food, energy and fertilizer crisis, a slowing Chinese economy, and the conclusion of COVID-19 stimulus packages as some of the near term concerns, with demographic issues like aging workforces and climate change as long term concerns.
The U.S. stock market fell for the first half of 2022, as inflation fueled investor pessimism, according to Marketwatch. However, a summer rally followed news that inflation was easing, before being halted as the Federal Reserve committed to battling inflation through tighter monetary policy, according to Marketwatch.
Grantham said that if the rally is able to endure, the current behavior of the market would break from the trend of superbubble behavior.
“If history repeats, the play will once again be a Tragedy,” said Grantham. “We must hope this time for a minor one.”
Grantham’s firm GMO did not immediately respond to the Daily Caller News Foundation’s request for comment.
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