The stock market is poised for another 20% decline this year as the bubble enters its final phase, according to GMO’s Jeremy Grantham.
Grantham said that in a worst-case scenario, the S&P 500 could fall upwards of 50% from current levels.
Grantham thinks investors are putting too much weight into the idea that the Fed cutting rates is a good thing.
Even a new year can’t shake the bearishness from GMO’s Jeremy Grantham, who said in a Tuesday letter that the stock market will drop another 20% this year.
Grantham said the ongoing deterioration of financial conditions will be capped off by a downturn in the housing market, representing the “final phase” of the stock market bubble that should help drive the S&P 500 to 3,200 by year-end.
In a worst-case scenario, Grantham sees the S&P 500 falling as much 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.
Michael Burry and Jeremy Grantham have warned an epic stock market crash is underway. Here’s what 5 doomsayers expect to happen next.
Michael Burry and Jeremy Grantham have both warned the stock-market crash is well underway.
Nouriel Roubini, Robert Kiyosaki, and Harry Dent also expect asset prices to plunge further.
Here’s a roundup of what five market doomsayers are predicting.
Michael Burry, Jeremy Grantham, and other market experts have warned the stock-market downturn this year is far from over.
Nouriel Roubini, Robert Kiyosaki, and Harry Dent are among those predicting asset prices will plunge further. They have cited excessive valuations, stubborn inflation, a potential recession, pandemic disruptions, and food and fuel crises as some of the reasons they expect a devastating crash.
Here’s what 5 doomsayers have said about the stock market:
Michael Burry
Michael Burry diagnosed last year an unprecedented bubble in asset prices, and warned it would culminate in the “mother of all crashes.” He hinted the meltdown is in full swing in a since-deleted tweet this week.
The investor of “The Big Short” fame shared a S&P 500 chart showing the stock-market index has plunged 18% from its December peak. “And yet I keep getting asked ‘wen crash?'” he wrote, implying the downturn is well underway.
Burry has suggested the S&P 500 could plummet by 53% to below 1,900 points over the next few years, based on the benchmark index’s bottom tick during previous crashes.
Jeremy Grantham
Jeremy Grantham cautioned an epic “superbubble” across stocks, bonds, and housing was about to collapse, writing in a research note this week.
The veteran investor and GMO cofounder dismissed the recent rebound in stocks as a brief reprieve, noting that previous superbubbles have always been followed by market declines of at least 50%.
Grantham outlined how a painful combination of pressures spell trouble for asset prices and global growth. He pointed to shrinking corporate margins, high inflation, interest-rate hikes, food and energy crises, pandemic disruptions, the Russia-Ukraine war, and longer-term issues such as ageing populations and labor shortages.
“Each cycle is different and unique — but every historical parallel suggests that the worst is yet to come,” he said.
Nouriel Roubini
Nouriel Roubini suggested during a recent webinar that the Federal Reserve might have to raise interest rates to 5% to rein in inflation. But he said a hike of that magnitude in the debt-ridden US economy could cause stocks, bonds, housing, credit, private equity, and other markets to crash.
The NYU Stern economist, whose nickname is “Dr. Doom,” argued the economy was poised to suffer a painful recession, which could drive stocks down by another 35%.
Roubini noted that stubborn inflation would likely weigh on stocks and bonds. He advised investors to hedge their portfolios with alternative assets such as gold, real estate, or bitcoin.
Robert Kiyosaki
Similar to Burry, Robert Kiyosaki sounded the alarm on the “biggest bubble in world history” last summer, and said it would end with an equally historic meltdown.
“THAT CRASH IS HERE,” he tweeted this week. “Millions will be wiped out.”
The “Rich Dad Poor Dad” author and personal-finance guru noted in another tweet that stocks, gold, silver, bitcoin, and real estate were all crashing. He said he expected the downturn to continue in the coming months.
However, Kiyosaki reassured investors that selloffs provide opportunities to scoop up bargains and ultimately get rich. He recalled borrowing millions of dollars to purchase cut-price real estate during the financial crisis.
Harry Dent
Harry Dent, a market historian and newsletter writer, warned investors that the recent bounce in stock prices would be followed by an even bigger decline.
“We had this first crash, a tepid bounce, and now we’ll have another one of the same magnitude,” the market historian and newsletter writer said in a recent radio interview.
Notably, Dent touted the expected downturn as a chance for young people to invest at reasonable prices, generate robust returns, and save for retirement. He recommended investing in multifamily real estate and long-dated Treasury bonds before asset prices crash.
6/6 SLIDES
The key to whether or not Grantham’s bleak scenario plays out this year hinges on investor confidence, which was on a slow yet steady decline throughout 2022 as every rally in stocks ended up being sold. Similar to 2000 or 2007, any substantial drop in investor confidence could lead to a swift unwind in asset prices, according to the note.
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Some of the “pins” that could pop investor confidence include housing markets rolling over, the economy entering a recession, and corporate profits starting to fall. The debt ceiling is another overhang for investors 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 investors shouldn’t look to the Federal Reserve for help in the form of interest rate cuts, according to Grantham. That’s because in 1929, 2000, and 2007, the largest part of the stock market decline occurred after the first rate 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.
“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 comfort in the fact that corporate earnings estimates have yet to significantly decline despite all of the bearish possibilities.
“But still I’d prefer a lot more optimism, which a year ago was nearly universal,” Grantham said.
