In almost Shakespearean fashion, permabears and famous pessimists Jeremy Grantham In a note on Wednesday, it said the market was in a superbubble and warned of significant turmoil ahead.
What is a super bubble? Okay, let’s get into it.
A typical bubble occurs when prices rise rapidly while investors ignore significant danger, eventually bursting and then prices falling. In these typical situations, the index increases by 2 standard deviations above the latest price average.
A superbubble would increase that number to more than 2.5, Grantham said. The market was at that point in 2021 when stocks recovered from their early pandemic lows.
“There are only a few market events in an investor’s career that really matter, and the most important of them is the super bubble,” said Grantham. “These superbubbles are distinct events. Investors can study only a small amount of history, but there are clear commonalities.”
One of these features is the bear market rally that occurs during the initial derating phase of the collapse, before the economy clearly starts to deteriorate, as is often the case when a superbubble collapses.
“Get ready for the grand finale — if history repeats itself, the play will be a tragedy again. We should expect something minor this time,” said GMO’s CEO.
History of Super Bubbles: Of course, lifelong pessimists allude to the great economic declines of 1929, 1973 and 2000. On each drop, the market recovered about half of its losses before free-falling to new lows.
In each of the previous three examples, bearish rallies helped recover more than half of the market’s initial losses, bringing back naive investors just as the market began to fall again.
This summer’s rallies fit that pattern perfectly.
- From the November 1929 low to the April 1930 high, the market rose 46%, recovering 55% of its losses from its peak.
- In 1973, after the initial decline, summer gains recovered by 59%. of the S&P 500 spy Total loss from high.
- During the 2000 tech bubble, the Nasdaq recovered 60% of its initial losses in just two months.
- In 2022, at the intraday high on August 16, the S&P has recovered 58% of its loss from its June low.
“So we can say that current events are eerily similar to these other historical superbubbles so far,” Grantham said.
The last word: All three major asset classes — housing, stocks and bonds — were historically significantly more expensive late last year, according to Grantham, making the current superbubble one of the most dangerous factors that have driven past superbubbles. It’s a combination.
“Given all these negative factors, it should come as no surprise that consumer and business confidence indices are testing historic lows,” he wrote. “And in the technology sector, which is at the forefront of the U.S. (and global) economy, employment is slowing, layoffs are on the rise, and CEOs are increasingly bracing for a recession.”