Jeremy Grantham Says Stock-Market Bubble Could Deflate in the Spring - Barron's

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Jeremy Grantham is credited with predicting the 2000 and 2008 downturns.

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Jeremy Grantham, the chief investment officer of GM O and a renowned stock-market skeptic, says that the “epic” stock bubble of today could deflate as early as the late spring.

“My best guess as to the longest this bubble might survive is the late spring or early summer, coinciding with the broad rollout of the COVID vaccine,” Grantham wrote in a note to investors titled “Waiting for the Last Dance.” “At that moment, the most pressing issue facing the world economy will have been solved. Market participants will breathe a sigh of relief, look around, and immediately realize that the economy is still in poor shape, stimulus will shortly be cut back with the end of the COVID crisis, and valuations are absurd. ‘Buy the rumor, sell the news.’”

Last year, GMO, which Grantham founded, dramatically reduced its exposure to stocks, cutting net equity exposure in its Benchmark-Free Allocation Strategy to 25% from 55%. Today, target equity exposure for the strategy is 29%.

Grantham has been early to call other bear markets: GMO got out of Japan in 1987, two years before it peaked in 1989. For years, he has called the current market overvalued as it marched higher.

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That has turned out to be premature. The S&P 500 closed up 16.3% for 2020, gaining just shy of 50% over the past two years, its largest two-year gain since 1999. The Dow Jones Industrial Average added 2068 points, or 7.3%, in 2020, while the Nasdaq Composite roared 43.6% higher last year. The small-cap Russell 2000 gained 18.4%.

Grantham is credited with predicting the 2000 and 2008 downturns and, more recently, has become known for speaking out about the perils of the changing climate and what it means for life on earth.

He argues that today’s bull market, born in 2009, “has finally matured into a fully-fledged epic bubble” that can be considered one of the great bubbles of financial history, akin to the South Sea bubble and those of 1929 and 2000. “These great bubbles are where fortunes are made and lost—and where investors truly prove their mettle,” he writes.

“The single most dependable feature of the late stages of the great bubbles of history has been really crazy investor behavior, especially on the part of individuals,” writes Grantham. Even though he owns a Tesla Model 3, Grantham’s personal favorite example of reckless behavior is the market value of Tesla (TSLA), which, at “now over $600 billion, amounts to over $1.25 million per car sold each year versus $9,000 per car for GM. What has 1929 got to equal that?”

Other examples of excess: The volume of small retail stock purchases; 248 special purpose acquisition company, or SPAC, listings; and the market’s vertiginous advance from its March lows. Meanwhile, the combination of a price/earnings ratio near the top of its historical range and an economy near the bottom “is completely without precedent, and may even be a better measure of speculative intensity than any SPAC,” Grantham writes.

Write to Leslie P. Norton at leslie.norton@barrons.com

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