A veteran US fund manager has warned investors to prepare for a ”tragedy” when current stock market valuations unwind.
Jeremy Grantham, the co-founder of Boston-based investment giant GMO, suggests the recent rally by equities on Wall Street is the final act of the current "superbubble".
In a research paper, Grantham wrote:” “One of those features is the bear-market rally after the initial derating stage of the decline but before the economy has clearly begun to deteriorate, as it always has when superbubbles burst.”
“This, in all three previous cases, recovered over half the market’s initial losses, luring unwary investors back just in time for the market to turn down again, only more viciously, and the economy to weaken. This summer’s rally has so far perfectly fit the pattern.”
Grantham added: “The US 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.”
“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."
Grantham said: "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.”
The fund manager said that economic data ‘inevitably’ lag major turning points in the economy and it is during this lag that “the bear-market rally typically occurs”.
If the bear market has already ended, the parallels with the three other US superbubbles – so far so strangely in line – would be completely broken, but Grantham suggests this is unlikely to be the case.
“Prepare for an epic finale,” he said. “If history repeats, the play will once again be a Tragedy. We must hope this time for a minor one.”