Jeremy Grantham warns of 17% drop in S&P 500 this year

(Bloomberg) — The bursting of the U.S. stock market bubble is far from over and investors shouldn’t get too excited about a good start to the new year, said Jeremy Grantham, co-founder and strategist. Long-term investment, warning. of GMOs.

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In fact, the 84-year-old money manager has calculated that the value of the S&P 500 at the end of the year will be around 3,200, he said in an article Tuesday. That means a drop of nearly 17% for the full year and a 20% year-over-year decline from current levels. Grantham believes the index will likely stay below that level for some time in 2023, covering around 3,000.

“The scope of the problems is bigger than usual – maybe as big as I’ve seen it,” Grantham said in an interview from Boston.

He added: “There are more things that can go wrong than can go right. “There’s a certain possibility that things could go wrong and we could basically get the system to start going completely wrong on a global basis.”

Grantham, who has long been one of Wall Street’s most famous bears, also doesn’t underestimate the idea that the benchmark index could drop to around 2,000, which, he says, that would be a “devastating drop”.

Value strategies have struggled with lackluster returns in the decade following the global financial crisis as growth stocks led the longest bull market in US stock history. But now, as the Federal Reserve tries to tame rising inflation with aggressive interest rate hikes, value strategies are being revived. GMO’s equity allocation strategy, which includes long- and short-term value stocks that the company considers valued at “unreasonable growth expectations,” surged nearly 15% last year. as of November.

Value has performed “a lot better” over the past year and has outperformed growth over that time period. Prior to that, growth had been solid 10 years, Grantham said, although values ​​had outperformed in previous decades. “In terms of value versus growth, value is still far more attractively positioned than growth,” he explains. “Half way back and still cheaper.” Value stocks could outperform growth stocks by 20 percentage points in the next year or two, he added.

As for what might be appealing right now, Grantham says an investor can divide a value stock into four quarters. The third group — which includes the “pretty cheap” — performed well last year and isn’t super hot anymore. But the cheapest quarter, without the best year, may be willing to maintain the best. He said: “It will be a very fun time.

Grantham views the process that adds pain to the stock market today as similar to the bursting of a bubble after other rare “investor confidence booms,” such as in 1929, 1972 and 2000. Ukraine and rising inflation, or falling growth due to Covid-19 and the supply chain problems that followed, Grantham believes the market is ready for a regardless.

While the first and “easiest” phase of the bubble burst has passed, Grantham says the next stage will be more complicated. The market’s seasonal strength in January and during the current phase of the presidential cycle could keep the market buoyant at the start of the year.

“Almost any peg can generate such supreme confidence and cause the first rapid and severe drop,” he writes. “They are just accidents waiting to happen, the complete opposite of the unexpected. But after a couple of spectacular bear market rallies, we are now approaching a much less reliable and more complex final phase.”

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