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Jeremy Grantham warns ‘tragedy’ looms as stock ‘superbubble’ may burst

by Ozva Admin

A “super bubble” appears perilously close to its “final act” after the recent rally in US stocks lured some investors into the market just before a potential “tragedy,” according to Jeremy Grantham, the legendary co-founder of the investment firm. based in Boston. OMG.

Grantham, who has repeatedly warned investors of a bubble in the markets, said on a paper on Wednesday that “superbubbles are events like no other” and share some common characteristics.

“One of those features is the bear market rally after the initial downgrade stage of decline, but before the economy has clearly started to deteriorate, as it always does when superbubbles burst,” Grantham said. “This, in the three cases above, recouped more than half of the market’s initial losses, luring in unsuspecting investors just in time for the market to go down again, only more viciously, and the economy to weaken. So far this summer’s rally has fit the pattern perfectly.”

The US stock market slumped during the first half of 2022 as investors anticipated that rising inflation would lead to an aggressive Federal Reserve. The S&P 500 closed at a low this year of 3,666.77 on June 16, before springing up during the summer along with other stock benchmarks amid investor optimism over signs that the highest inflation in decades was fading.

Fed Chairman Jerome Powell recently that rally ended with his August 26 speech at the economic symposium in Jackson Hole, Wyoming, ending this month’s gains by reiterating that the central bank would continue to tighten monetary policy to control runaway inflation. He warned that the Fed will fight inflation until the job is done, even if it may cause problems for households and businesses.

“The US stock market remains very expensive and a spike in inflation like this year has always hit multiples, albeit more slowly than normal this time,” Grantham said. “But now the fundamentals have also started to deteriorate in a huge and surprising way: Between COVID in China, war in Europe, food and energy crises, record fiscal tightening and more, the picture is much bleaker than previously thought. I could have foreseen in January.”

Grantham had warned in a January paper that the US was nearing the end of a “super bubble” encompassing stocks, bonds, real estate and commodities following massive stimulus during the COVID-19 pandemic.

Watch: ‘Good luck! We’ll all need it’: US market nears end of ‘superbubble’, says Jeremy Grantham

In his Wednesday article, Grantham said that “the current superbubble features an unprecedentedly dangerous combination of cross-asset overvaluation (with bonds, housing and stocks all critically overvalued and now rapidly losing momentum), commodity shock and hawkish stance.” of the Fed”.

Superbubble bursting has multiple stages, according to Grantham.

First the bubble forms and then a “pull back” in valuations, as the one seen in the first half of 2022 – occurs when investors realize “perfection” won’t last, he said. “Then there is what we just saw: the bear market rally,” before finally “fundamentals deteriorate” and the market drops to a bottom.

“Superbubble bear market rallies are easier and quicker than any other rallies,” he said. “Investors assume that these shares sold for $100 6 months ago, so now at $50, $60 or $70, it must be cheap.”

At the intraday peak on August 16, the S&P 500 had recovered 58% of its losses since the June low, according to Grantham. That was “eerily similar to these other historical superbubbles.”

For example, “from the low of November 1929 to the high of April 1930, the market rallied 46%, a 55% recovery of the loss since the peak,” he said.

He also highlighted the “speed and scale” of other bear market rallies.

“In 1973, the summer rally after the initial drop recovered 59% of the S&P 500’s total loss from the peak,” 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.”

US stocks closed 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,
-0.88%
fell 0.9%, while the S&P 500 SPX,
-0.78%
fell 0.8% and the tech-heavy Nasdaq Composite COMP,
-0.56%
slipped 0.6%.

Read: The stock market’s summer rally petered out in August. This is what history says about September.

“Economic data inevitably lags behind major turning points in the economy,” Grantham said. “To make matters worse, in the turn of events like 2000 and 2007, data series like corporate earnings and employment can be revised down massively.”

“It is during this lag that the bear market rally typically occurs,” he said. And now the current superbubble seems to have “paused between the third and last act,” according to Grantham.

“Prepare for an epic finale,” he said. “If history repeats itself, the play will once again be a tragedy. We must wait this time for a minor one.”

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