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Jeremy Grantham warns of looming ‘tragedy’ as stock ‘superbubble’ could burst

According to Jeremy Grantham, the legendary co-founder of the Boston-based investment firm, the recent rally in U.S. stocks has pushed some investors back into the market just before a potential “tragedy.” After that, the “superbubble” appeared dangerously close to the “final action”. GMOs.

Grantham, who has repeatedly warned investors about market bubbles, said in a paper Wednesday that “superbubbles are one-of-a-kind events” that share some commonalities.

“One of these features is that after the initial mitigation phase of a recession, as is always the case when a superbubble bursts, a bear market rises before the economy clearly begins to deteriorate. That’s it,’ he said. “This has, in all three cases so far, recovered more than half of the market’s initial losses, lured unwary investors back in time for the market to fall again, and further viciously undermined the economy. This summer’s rally has fitted the pattern perfectly so far.”

The US stock market crashed in the first half of 2022. Investors had expected a spike in inflation would lead to a hawkish Fed. Others amid investor optimism over signs that inflation is easing, after the S&P 500 closed at its highest level in decades at 3,666.77 on June 16. stock benchmarks surged over the summer.

Federal Reserve Chairman Jerome Powell recently addressed an economic symposium in Jackson Hole, Wyoming, on Aug. It reiterated its intention to continue tightening, negating this month’s gains. He warned that the Fed would fight inflation until the job was done, even if it could cause pain to households and businesses.

“The U.S. stock market is still very expensive, and rising inflation like this year has always hurt multiples, though this time more slowly than usual,” Grantham said. “But now fundamentals are also starting to deteriorate surprisingly significantly. Between COVID in China, war in Europe, food and energy crises, record fiscal tightening, etc. It’s a lot tougher than we could have predicted.”

In a January paper, Grantham warned that the U.S. was nearing the end of a “superbubble” spanning stocks, bonds, real estate and commodities following massive stimulus during the COVID-19 pandemic. .

look: ‘Good luck!We’re all going to need it’: US market nearing end of ‘superbubble’, says Jeremy Grantham

“The current superbubble is characterized by cross-asset overvaluations (bonds, homes and equities are all very expensive and currently losing momentum quickly), commodity shocks and Fed hawks,” Grantham said in a paper Wednesday. It features an unprecedented and dangerous combination of sects.”

Grantham says there are multiple stages to a superbubble bursting.

He said a bubble would form first and a valuation “recession” like we saw in the first half of 2022 as investors realize that “perfection” won’t last. After “then we saw a bear market rally,” eventually “fundamentals deteriorated” and the market slumped to lows.

“A bear market rally in a superbubble is easier and quicker than any other,” he said. “Investors speculate that the stock sold for $100 six months ago and is now $50, $60 or $70, so it must be a bargain.”

At its intraday high on Aug. 16, the S&P 500 has recovered 58% of its losses from its June low, according to Grantham. It “was eerily similar to these other historical superbubbles”.

For example, “From the November 1929 low to the April 1930 high, the market rose 46%, which is a 55% recovery in losses from the peak,” he said.

He also highlighted the “speed and magnitude” of other bear market gains.

“In 1973, 59% of the S&P 500’s total losses recovered from its highs in the summer rally after the initial decline,” he wrote. More recently, in 2000, Grantham wrote, “The Nasdaq, which was the main event of his bubble in tech, recovered his 60% of its initial losses in just two months.”

US stocks closed lower on Wednesday, with all three major benchmarks posting a fourth straight day of declines on the last day of August. Dow Jones Industrial Average DJIA,
-0.88%
S&P 500 SPX,
-0.78%
Tech-focused Nasdaq Composite COMP fell 0.8%
-0.56%
It fell 0.6%.

read: Summer rally in stock markets lost steam in August. Here’s what history says about September.

“Economic data inevitably lags major turning points in the economy,” Grantham said. data could be revised down significantly.”

“It is during this time lag that a bear market rally typically occurs,” he said. And now, according to Grantham, the current superbubble appears to be “pausing between the third and final act.”

“Get ready for the grand finale,” he said. “If history repeats itself, the play will become a tragedy again. We must expect something minor this time.”

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