- The stock market is poised for one more 20% decline this year because the bubble enters its final part, in accordance with GMO’s Jeremy Grantham.
- Grantham said that in a worst-case state of affairs, the S&P 500 might fall upwards of fifty% from present ranges.
- Grantham thinks traders are placing an excessive amount of weight into the concept that the Fed reducing charges is an efficient factor.
Even a brand new year cannot shake the bearishness from GMO’s Jeremy Grantham, who said in a Tuesday letter that the stock market will drop one other 20% this year.
Grantham said the continued deterioration of economic circumstances might be capped off by a downturn in the housing market, representing the “final phase” of the stock market bubble that ought to assist drive the S&P 500 to three,200 by year-end.
In a worst-case state of affairs, Grantham sees the S&P 500 falling as a lot as 50% to about 2,000.
“Even the direst case of a 50% decline from here would leave us at just under 2,000 on the S&P, or about 37% cheap. To put this in perspective, it would still be a far smaller percent deviation from trendline value than the overpricing we had at the end of 2021 of over 70%. So you shouldn’t be tempted to think its absolutely cannot happen,” Grantham warned.
The key as to if or not Grantham’s bleak state of affairs performs out this year hinges on investor confidence, which was on a sluggish but regular decline all through 2022 as each rally in stocks ended up being bought. Similar to 2000 or 2007, any substantial drop in investor confidence might result in a swift unwind in asset costs, in accordance with the note.
Some of the “pins” that would pop investor confidence embody housing markets rolling over, the economy getting into a recession, and company earnings beginning to fall. The debt ceiling is one other overhang for traders this year.
“Almost any pin can prick such supreme confidence and cause the first quick and severe decline,” Grantham said. “To prick these bubbles all you have to do is have investors question whether their nearly perfect economic and financial conditions can indeed be extrapolated forever.”
And traders should not look to the Federal Reserve for assist in the type of rate of interest cuts, in accordance with Grantham. That’s as a result of in 1929, 2000, and 2007, the most important a part of the stock market decline occurred after the first fee cut from the Fed.
“Despite… the painful recent experiences of the 2000 and 2008 bear markets, we continue to hold onto the hope that the first rate cut will be guaranteed to kill the bear. We really are an incredibly optimistic species that these very negative examples, despite being clear and recent, are so easily ignored,” Grantham said.
On the flipside, one factor that worries Grantham, who calls himself a contrarian investor, is the truth that so many Wall Street strategists are bearish too.
“Equally disturbing, it is said to be one of the most widely predicted recessions ever. It is all enough to make a god-fearing contrarian wake up in the night sweating,” Grantham said. But Grantham does take consolation in the truth that company earnings estimates have but to considerably decline regardless of all the bearish prospects.
“But still I’d prefer a lot more optimism, which a year ago was nearly universal,” Grantham said.