A ‘superbubble’ appears dangerously close to its ‘final act’ after the recent rally in US equities drew some investors into the market ahead of a potential ‘tragedy’, according to legendary company co-founder Jeremy Grantham. Boston-based investment. GMOs.
Grantham, who has repeatedly warned investors of a market bubble, said in a paper Wednesday that “superbubbles are events like no other” and share some common characteristics.
“One of those features is the bear market rallying after the initial downgrade phase, but before the economy clearly starts to deteriorate, as is always the case when super bubbles burst,” he said. said Grantham. “This, in all three previous cases, recouped more than half of the market’s initial losses, luring in unwary investors just in time for the market to fall again, but more sharply, and the economy to weaken. . So far this summer’s rally has fitted the model perfectly.
The U.S. stock market fell in the first half of 2022 as investors anticipated soaring inflation would lead to a hawkish Federal Reserve. The S&P 500 closed at a year-to-date low of 3,666.77 on June 16, before outbreak during the summer along with other equity indices amid investor optimism over signs that the highest inflation in decades was easing.
Fed Chairman Jerome Powell recently finished this rally with his Aug. 26 speech at the economic symposium in Jackson Hole, Wyoming, wiping out this month’s gains as he reiterated that the central bank would continue to tighten monetary policy to rein in soaring inflation. He warned the Fed would fight inflation until the job is done, even though it could hurt households and businesses.
“The US stock market remains very expensive and a rise in inflation like this year’s has always hurt multiples, albeit slower than normal this time around,” Grantham said. “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 much bleaker. than could have been expected in January.”
Grantham had warned in a January article that the United States was nearing the end of a “superbubble” covering stocks, bonds, real estate and commodities following a massive stimulus during the COVID pandemic. -19.
See: ‘Good luck! We’ll all need it’: US market nears end of ‘superbubble’, says Jeremy Grantham
In his Wednesday post, Grantham said that “the current superbubble presents an unprecedented mix of cross-asset overvaluation (with bonds, housing and equities all hugely overvalued and now losing momentum), a commodity shock first and an aggressive Fed”.
The bursting of superbubbles involves several stages, according to Grantham.
First the bubble forms, then a “pullback” in valuations – as the one seen in the first half of 2022 — comes as investors realize “perfection” won’t last, he said. “Then there is what we just saw – the bear market rally,” before eventually “fundamentals deteriorate” and the market falls to a low.
“Bear market rallies in the Superubles are easier and faster than any other rally,” he said. “Investors assume this stock sold for $100 6 months ago, so now at $50, or $60, or $70, it must be cheap.”
At the Aug. 16 intraday high, the S&P 500 had recovered 58% of its losses since its June low, according to Grantham. It was “eerily similar to those other historical superbubbles”.
For example, “from the November 1929 low to the April 1930 high, the market rebounded 46% – a 55% recovery of the loss from the high,” he said.
He also pointed to the “speed and magnitude” of other bear market rallies.
“In 1973, the summer rally after the initial decline recovered 59% of the S&P 500’s total loss from the top,” he wrote. More recently, in 2000, Grantham wrote that “the Nasdaq (which had been the main event of the tech bubble) recovered 60% of its initial losses in just 2 months”.
U.S. stocks ended lower on Wednesday, with all three major benchmarks posting a fourth straight day of declines on the last day of August. The Dow Jones Industrial Average
DJIA,
fell 0.9%, while the S&P 500
SPX,
fell 0.8% and the tech-heavy Nasdaq Composite
COMP,
slipped 0.6%.
“Economic data inevitably lags major turning points in the economy,” Grantham said. “To make matters worse, at the turn of events like 2000 and 2007, data series like corporate earnings and employment may then be massively revised downwards.”
“It is during this lag that the bear market rally typically occurs,” he said. And now, the current superbubble appears to have “paused between the third and final act”, according to Grantham.
“Get ready for an epic finale,” he said. “If history repeats itself, the play will again be a tragedy. Hopefully a minor this time around.