What You Need to Know
- The current superbubble features a dangerous mix: cross-asset overvaluation, commodity shock and a hawkish Fed, Grantham says.
- This summer's bear market rally fits the superbubble pattern, he says.
- If historical patterns repeat, he writes, the market could be in for a tragedy.
The stock market’s current “superbubble” has yet to burst, renowned investment strategist and forecaster Jeremy Grantham suggested in an opinion piece, warning investors that a financial “tragedy” may be in the offing.
Grantham, co-founder of the asset manager GMO, made the comments on his firm’s website Wednesday as U.S. equities experienced the fourth day straight day in a major sell-off.
“The current superbubble features an unprecedentedly dangerous mix of cross-asset overvaluation (with bonds, housing and stocks all critically overpriced and now rapidly losing momentum), commodity shock, and Fed hawkishness,” he wrote. “Each cycle is different and unique — but every historical parallel suggests that the worst is yet to come.”
Grantham, known for accurately calling past market bubbles, cited parallels between current market conditions and those of the three previous superbubbles in 1929, 1972 and 2000, saying the current one appears to have paused between its third and final acts.
“Prepare for an epic finale,” he cautioned investors.
Superbubbles, unlike other market phenomena, are among the most important events in an investor’s career and have clear features in common, Grantham wrote.
“One of those features is the bear market rally after the initial derating stage of the decline but before the economy has clearly begun to deteriorate, as it always has when superbubbles burst. This in all three previous cases recovered over half the market’s initial losses, luring unwary investors back just in time for the market to turn down again, only more viciously, and the economy to weaken,” he said.