Jeremy Grantham: Current 'superbubble' hasn't deflated yet ... 'prepare for an epic finale'

Aug. 31, 2022 5:03 PM ETBy: Brian Stewart, SA News Editor174 Comments

Bubble Shot

Adrian Los

High-profile investor Jeremy Grantham argued Wednesday that the current "superbubble" in asset prices hasn't deflated yet and warned investors to "prepare for an epic finale" to the market cycle.

In a research note, the co-founder and chief investment strategist of GMO compared the current market environment to three previous times he has categorized as "superbubbles."

This list includes the dot-com bubble that burst in 2000, the 1929 market crash that led to the Great Depression and the "Nifty Fifty" period in 1972 (which he identifies as an "honorary member" because the bubble was not as extensive as the other two). Previously, Grantham has also noted an equity superbubble in Japan in 1929 and a housing superbubble in the U.S. in the lead-up to the 2008 financial crisis.

"If history repeats, the play will once again be a Tragedy," Grantham wrote in Wednesday's note. "We must hope this time for a minor one."

The GMO co-founder characterized the recent upswing in the market as a "bear rally" and identified a host of near-term issues that will provide headwinds for the market. This included policy tightening by central banks, food and energy shortages and challenges in China, where "too many things are going wrong at the same time."

Grantham also spotlighted longer-term problems that could bedevil the stock market, including population dynamics and the climate, which he says "can be seen this year as in danger of spiraling out of control."

In making his case for ongoing headwinds, the famed investor pointed to signs of weakness in the overall economy, such as low readings for consumer and business confidence. "And in the tech sector, the leading edge of the U.S. (and global) economy, hiring is slowing, layoffs are rising and CEOs are increasingly bracing for recession," he wrote.

"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," Grantham stated.

He added: "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."

For another perspective on the current market, see why J.P. Morgan analyst Elyse Ausenbaugh thinks investors have struggled with the "pretzel logic" of the Fed's inflation-fighting campaign.

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