Grantham warns that the liquidation is only halfway there

  • Stocks plunged into a bear market on Friday, falling 20% ​​from recent highs during the session.
  • According to Jeremy Grantham, the market has a lot more to go down.
  • He said stocks are in a “real McCoy” bubble.

On January 20, investment legend Jeremy Grantham published an essay with the ominous headline “Let The Wild Rumpus Begin.”

The bullish frenzy was about to turn bearish, he warned.

At the time, the S&P 500 was down just 6% from its recent highs, following a more than 100% rise in the index in less than two years, and the market was still getting used to the idea that a significantly tighter monetary policy. go ahead.

For example, around the same time, Savita Subramanian, head of Equity and Quantitative Strategy at Bank of America, delivered what was then considered a rather shocking prediction that the Fed would institute around seven 25 basis point rate hikes. That opinion is now a consensus.

Since January 20, the S&P 500 has fallen another 14%, officially plunging into

bear market

territory, 20% below its highs, on Friday.

Grantham, the founder of asset management firm GMO, has said in recent days that the sell-off is not over yet.

In an interview with Ray Dalio, the founder of Bridgewater Associates, recorded on May 9 and published on May 19, Grantham compared the current environment to past bubbles and warned of similar consequences.

“This is the real McCoy,” said Grantham, who called the dotcom bust and crash of 2008. “It seems to be happening pretty close to 2000.”

Grantham listed the qualities he uses to define bubbles: “almost hysterical behaviour, really weird over-optimism”; rapid price appreciation; and blue chip stocks rise while “risky” stocks fall. He said this was evident in the S&P 500 rising 25% more than the Russell 2000, a small-cap index. He also pointed to the over-optimism that was evident in the movement of meme stocks, bitcoin and hedge funds like Cathie Woods’ ARKK, which have suffered considerable losses since their peaks.

Now it is the turn of the S&P 500.

“I think the declines will be very substantial,” he said.

On CNBC on Thursday, Grantham was more specific, saying the sell-off was only halfway over, meaning he thinks a 40% drop for the index is expected before all is said and done. If that scenario materializes, the S&P 500 would fall to 2,875. It closed near 3,869 on Friday.

He also said a 1970s-style stagflation environment is likely and the United States will enter a recession shortly.

Grantham’s views in context

Grantham’s views for the coming months are among some of the most dovish on Wall Street.

The most bearish strategist

major banks

Morgan Stanley’s Mike Wilson has an S&P 500 price target of 3,900 for the next 12 months.

But in the short term, Wilson sees more pain ahead. He said in an early May note that “this bear market rally is far from complete” and the index could fall as low as 3,460.

And in a May 10 note, Wilson said: “3900 implies we expect to overshoot our short-term downside target before returning to 3900 next spring.”

This week, Guggenheim Partners global CIO Scott Minerd also told MarketWatch that the S&P 500 could drop 45% from January highs.

Others have turned increasingly bearish in recent months as tighter monetary policy is expected to have a negative impact on economic growth and corporate profits.

Goldman Sachs chief US equity strategist David Kostin has cut his price target on the S&P 500 three times this year, from 4,900 to 4,700 to 4,300 as of this week. if a


materialize in the next year, which Goldman says there is a 35% chance of happening, Kostin said the index would fall to 3600.

Some are more long-term bearish, including Deutsche Bank, which said in April it expected a recession by the end of 2023 with a 20% drop in the S&P 500 preceding it. Meanwhile, Credit Suisse equity chief Jonathan Golub said he expects a recession in early 2024.

But overall, a recession is not the base case for most of Wall Street, and a plurality of strategists still have bullish price targets for 2022. The most bullish include Oppenheimer’s John Stoltzfus with a 5,330 price target and Bank’s Deutsche Binky Chadha (despite its 2023 recession call) with a price target of 5250.

The median on Wall Street is 4,800, which is a 24% increase from current levels.

The market situation is developing rapidly, making it difficult to determine the future of the stock. In the last four months alone, the macroeconomic outlook has changed dramatically.

Inflation has started to moderate, going from 8.5% to 8.3% in April. Still, it remains well above the Fed’s long-term target of 2%.

If the central bank continues its tightening spree, Grantham could be right and there could be more pain to come.

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