US stock market in ‘epic bubble’ just like 1929 crash, warns famed investor Jeremy Grantham; tells what to do

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Updated: January 06, 2021 5:23 PM

The long bull market run on Wall Street since 2009 has now turned into a full-fledged epic bubble, said billionaire investor Jeremy Grantham yesterday

US Stocks, Wall Street, COVID-19Shares fell in Paris, London and Tokyo but advanced in Hong Kong and Shanghai. Most U.S. markets are closed Monday for a national holiday.

The long bull market run on Wall Street since 2009 has now turned into a full-fledged epic bubble, said billionaire investor Jeremy Grantham yesterday. This came from Jeremy Grantham after the benchmark S&P500 rallied over 16 per cent since lows of March 2020, recovering nearly 30 per cent. GMO co-founder Jeremy Grantham said that even as this bubble may survive for a little longer, it will soon burst, advising investors to find opportunities in deep value stocks.

In a note titled “Waiting for the Last Dance,” Grantham warned that this bubble will burst in due time and even the US Federal Reserve will not be able to stop its damaging effects on the economy and portfolios. The S&P 500 index has zoomed over 455 per cent since the closing level of 676.53 points on March 9, 2009 — the financial crisis day. The index has delivered 14.39 per cent 10-year annualised returns. The benchmark index ended the year 2020 at 3,756,07 levels.

How long will this bubble survive?

Jeremy Grantham forecasts that the longest this bubble might survive is the late spring or early summer, coinciding with the broad rollout of the COVID-19 vaccine. He advised to not wait for the Goldmans and Morgan Stanleys to become bearish, as it can never happen. Last year, in 2020, US stock markets plunged into a bear market due to the surging COVID-19 cases and lockdowns in most of the countries to contain the fast-spreading deadly virus. “I am not at all surprised that since the summer the market has advanced at an accelerating rate and with increasing speculative excesses,” he said. 

What should investors do?

Grantham advised that this is what one should expect from a late-stage bubble – an accelerating, nearly vertical stage of unknowable length – but typically short. “Even if it is short, this stage at the end of a bubble is shockingly painful and full of career risk for bears,” he said. The billionaire investor sees this as a late stage of a bubble as prices move further away from trend, at accelerating speed and with growing speculative fervour.

Jeremy said that today’s market features extreme disparities in value by asset class, sector, and company. Those at the very cheap end include traditional value stocks all over the world, relative to growth stocks. He added that value stocks have had their worst-ever relative decade ending December 2019, followed by the worst-ever year in 2020, with spreads between Growth and Value performance averaging between 20 and 30 percentage points for the single year. “Not surprisingly, we believe it is in the overlap of these two ideas, Value and Emerging, that your relative bets should go, along with the greatest avoidance of the US Growth stocks that your career and business risk will allow,” he said.

Why the doomsday prediction

Comparing the current period to the South Sea bubble, stock market crash of 1929, and tech bubble of 2000, Grantham said that extreme overvaluation, explosive price increases, and hysterically speculative investor behavior, will make this event as one of the great bubbles of financial history. “These great bubbles are where fortunes are made and lost — and where investors truly prove their mettle,” he added.

According to him, the success for a bear market call is that sooner or later there will come a time when an investor is pleased to have been out of the market. The note highlighted that the market is much higher today than it was last fall when the economy looked fine and unemployment was at a historic low. “Today the P/E ratio of the market is in the top few per cent of the historical range and the economy is in the worst few per cent,” Grantham said.

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