Stock market ‘tragedy’ when ‘superbubble’ bursts

Regardless of a summer season rally, the US inventory market continues to be an unprecedented “superbubble” that can trigger monetary “tragedy” for traders when it bursts, in accordance with famed investor Jeremy Grantham.

Grantham, the co-founder of asset administration agency GMO in Boston, mentioned the present superbubble is coming into its “remaining act” as a consequence of deteriorating financial circumstances. A latest “bear market rally” that noticed the S&P 500 recoup 58% of its losses from a June low follows the sample of previous inventory market crashes in 1929, 1973 and 2000, he added.

“The present superbubble options an unprecedentedly harmful mixture of cross-asset overvaluation (with bonds, housing, and shares all critically overpriced and now quickly shedding momentum), commodity shock, and Fed hawkishness,” Grantham wrote in a letter to purchasers dated Wednesday.

“Every cycle is totally different and distinctive – however each historic parallel means that the worst is but to return,” he added.

The broad-based S&P 500 hit an intraday low of three,636.87 in June as traders reacted to the Federal Reserve’s coverage tightening in response to decades-high inflation readings. However shares rallied by mid-August amid optimism that inflation had peaked and the Fed would possibly reverse course.

Fed Chair Jerome Powell dashed these hopes on the central financial institution’s annual summit in Jackson Gap, Wyoming, final week, when he reiterated that hikes would proceed till inflation was underneath management. The market has closed decrease for 4 consecutive days since Powell’s speech.

Grantham, who predicted in January that the S&P 500 may plunge almost 50% from its degree on the time, famous short-term stress from meals and vitality shortages associated to the Russia-Ukraine struggle, ongoing COVID-19 lockdowns in China in addition to “one of many best fiscal tightenings in historical past” because the US and different international locations ended pandemic-era stimulus applications.

“Earlier superbubbles noticed a a lot worse subsequent financial outlook in the event that they mixed a number of asset courses: housing and shares, as in Japan in 1989 or globally in 2006; or in the event that they mixed an inflation surge and fee shock with a inventory bubble, as in 1973 within the US and elsewhere,” Grantham wrote.

“The present superbubble options essentially the most harmful combine of those components in trendy instances: all three main asset courses – housing, shares, and bonds – have been critically traditionally overvalued on the finish of final yr,” he added.

Grantham added that present market circumstances are “precisely in line” with historic precedents.

“If historical past repeats, the play will as soon as once more be a Tragedy. We should hope this time for a minor one,” he wrote.