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The stock market ‘tragedy’ when the ‘superbubble’ bursts

Despite the summer’s rally, the U.S. stock market remains an unprecedented ‘superbubble’ that will spell financial ‘tragedy’ for investors when it bursts, according to prominent investor Jeremy Grantham. wax.

Grantham, co-founder of Boston-based asset manager GMO, said the current super bubble is in the “final stages” due to worsening economic conditions. The recent “bear market rally” in which the S&P 500 recaptured its 58% loss from its June low follows the pattern of past stock market crashes in 1929, 1973 and 2000. he added.

“The current superbubble is an unprecedented and dangerous combination of cross-asset overvaluations (bonds, housing and equities are all very expensive and currently losing momentum), commodity shocks and Fed hawks. It features,” Grantham wrote in a letter to customers on Wednesday.

Jeremy Grantham
Jeremy Grantham is known for calling market bubbles.
Bloomberg via Getty Images

“Each cycle is different and unique, but all the historical parallels suggest that the worst is yet to come,” he added.

The broad S&P 500 hit an intraday low of 3,636.87 in June as investors reacted to the Federal Reserve’s tightening policy in response to the highest inflation in decades. But stocks rallied until mid-August amid optimism that inflation could peak and the Fed could reverse course.

Worried NYSE Traders
Stocks have fallen since Federal Reserve Chairman Jerome Powell hinted that interest rates would continue to rise.
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Fed Chairman Jerome Powell dashed those hopes last week at the Fed’s annual summit in Jackson Hole, Wyoming, when he repeatedly said he would keep raising rates until inflation was brought under control. Since Powell’s speech, the market has closed four days in a row with him lower.

Grantham, who predicted in January that the S&P 500 could fall nearly 50% from its then-current levels, said food and energy shortages linked to the war between Russia and Ukraine and lockdowns due to the ongoing COVID-19 in China. Down, and as the US and other countries ended pandemic-era stimulus, it was “one of the biggest fiscal tightenings in history.”

Jeremy Grantham
Jeremy Grantham has been warning for months that the market is a super bubble.
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“Previous superbubbles, like Japan in 1989 and the world in 2006, had far worse economic prospects after them when they combined multiple asset classes: housing and equities. If a spike in inflation and an interest rate shock are combined with an equity bubble, as has happened in the United States and elsewhere,” Grantham wrote.

“The current superbubble is characterized by the most dangerous combination of these factors in our time. All three major asset classes – housing, stocks and bonds – were historically overvalued late last year. .

Worried NYSE Traders
Grantham said the recent market rally will be temporary.
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Grantham added that current market conditions “exactly match” historical precedents.

“If history repeats itself, the play will become a tragedy again. We should expect something minor this time,” he wrote.

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