Jeremy Grantham warned the S&P 500 could plummet by another 26% in the next year, as financial markets face an unprecedented confluence of challenges. He also revealed he’s betting against the Nasdaq index and junk bonds.
Dark days ahead
“This is a more dangerous looking moment in global economics than even the madness of the housing bubble of 2007,” Grantham told the Reuters Global Markets Forum on Wednesday.
The veteran investor and GMO cofounder said the benchmark US stock index might drop from roughly 4,000 points today to 3,000 points over the next 12 months, representing a 38% decline from its December peak. The S&P 500 is down about 15% this year.
“The deterioration in fundamentals on a global basis looks absolutely shocking,” he said, according to Reuters.
Grantham sounded the alarm on a “superbubble” in asset prices in January, and declared it was entering its devastating final act in a research note published on August 31.
In the note, he underscored the dangerous combination of hugely overvalued stocks, bonds, and housing; soaring inflation and interest-rate shocks; and surges in commodity and energy prices. He also flagged Russia’s invasion of Ukraine, ongoing COVID-19 lockdowns in China, and shortages of food and resources as additional concerns.
GMO’s long-term investment strategist told the Reuters forum to brace for a collapse in growth stocks, chaos in global housing markets, and rising mortgage rates squeezing homeowners.
Grantham also predicted stubborn inflation and sustained pressure on stocks. He pointed to climate change disrupting economies, national workforces shrinking due to low birth rates, and the worldwide supply of commodities drying up.
Moreover, he emphasized that inflation has eroded investors’ real returns over the past year, making “a marginal bear market a fairly serious bear market.”
Capitalizing on the crash
Grantham is seeking to profit from the massive fallout he expects. Through his $1.5 billion charitable foundation, he’s placed wagers against the tech-heavy Nasdaq and high-yield bonds, he told The Times in an interview published on Friday.
The Nasdaq has plunged 25% from its November peak. The index is generally viewed as riskier and more volatile than the S&P 500, as it has a larger proportion of fast-growing, aggressively valued, unprofitable companies among its constituents.
High-yield or junk bonds are rated lower than investment-grade bonds by credit agencies. They offer larger yields to investors, but tend to be more volatile and carry greater default risk than higher-rated bonds.
Grantham’s wager suggests he expects tech stocks to tumble and corporate defaults to soar when the superbubble bursts, sending tech stocks and junk bonds downward.
