Jeremy Grantham says the S&P 500 will fall at least 40% from its peak as the stock market bubble looks a lot like 2000 all over again
Jeremy Grantham is a famous investor and stock market historian. Matthew Lloyd/Getty Images
Jeremy Grantham maintains that the stock market is in a 2000-like bubble.
Grantham said in a CNBC interview that he expects the S&P 500 to fall at least 40% from its peak.
"We should go into some kind of recession pretty quickly," Grantham said.
GMO's Jeremy Grantham believes the stock market is in a 2000-like bubble that is in the process of deflation, according to an interview with CNBC on Wednesday.
Grantham said he expects the S&P 500 to fall at least 40% from its peak in what will likely be a multi-year decline for stocks. That would take the S&P 500 to about 2,880 points, a level not seen since the COVID-19 bear market in March 2020. The S&P 500 is currently down 18% year-to-date, trading at the 3,925 level on Wednesday afternoon.
On the surface, the current stock market resembles the dot-com bubble of 2000, as much of the damage has been focused on US technology stocks.
“This bubble looks very 2000 on the surface, centered on US technology, led by the Nasdaq, which rose to incredible highs, with the Nasdaq's opening weakness beginning to fall along with the Russell 2000 long before the S&P . ' Grantham said.
But there are a few key differences between the dot-com bubble of 2000 and today's stock market that scare Grantham.
"What I'm afraid of is that there are a few differences from 2000 that are more serious. One is that 2000 was all in US stocks, bonds were great, yields were terrific, housing was cheap [and] commodities were dope," Grantham said, adding that 2000 was comparatively to today "paradise was".
But commodity prices are through the roof as Russia continues its war on Ukraine and the fact that interest rates are being raised from a near 0% floor is causing major pain for the bond market.
"What you never want to do in a bubble is get into real estate, and we're selling at a higher multiple of family income than we did in 2006 at the peak of the so-called real estate bubble. Also, the bond market lately has had its lowest lows in 6,000 year history. In addition, energy [prices] have gone up, [and] metal and food prices are actually higher in the UN Index than ever before in real terms," Grantham said.
"So we really play around with all assets, so historically that's proven to be very dangerous," Grantham added, pointing to similarities between today's and Japan's massive wealth bubble in the late 1980s. Japanese stocks have yet to reach the 1989 high.
And while investors are keen to seek opportunities in the stock market given valuations have not been reached in years, Grantham urges caution, emphasizing that most companies' estimated profit margins will deteriorate as an economic recession hits.
“The first thing that goes down in a recession is profit margins, and that's very likely to happen this time around. We should go into some kind of recession pretty quickly.”
That scenario is playing out in retail earnings this week, with both Walmart and Target forecasting an increase in input costs and lower profit margins.
Even bleaker is the possibility of Grantham's projected recession turning into something like the 1970s, with economic growth slowing and inflation lingering.
"They have shades of stagflation like we had in the 1970s."
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