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GMO’s Jeremy Grantham warns: The stock market is in a 'fully-fledged epic bubble'

Ines Ferré
·Markets Reporter
·3 min read
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“The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble,” says GMO’s co-founder Jeremy Grantham.

“Featuring extreme overvaluation, explosive price increases, frenzied issuance, and hysterically speculative investor behavior, I believe this event will be recorded as one of the great bubbles of financial history,” wrote the investor.

He compares this period to the South Sea bubble, the 1929 market crash, and the dot-com boom of 2000.

“These great bubbles are where fortunes are made and lost – and where investors truly prove their mettle. For positioning a portfolio to avoid the worst pain of a major bubble breaking is likely the most difficult part,” he wrote.

He warns the bubble will burst in due time, “no matter how hard the Fed tries to support it, with consequent damaging effects on the economy and on portfolios.”

A trader blows a chewing gum bubble as he works on the floor of the New York Stock Exchange shortly after the opening bell, in New York, June 15, 2015. Investors are braced for further reaction on world stock markets after Greece closed its banks and imposed capital controls on Sunday to check the growing strains on its crippled financial system, bringing the prospect of being forced out of the euro into plain sight. After bailout talks between the leftwing government and foreign lenders broke down at the weekend, the European Central Bank froze vital funding support to Greece's banks, leaving Athens with little choice but to shut down the system to keep the banks from collapsing. Across the Atlantic, photos of the hands, faces and expressions of traders at the New York Stock Exchange show the tension of tracking the markets and their reaction to fast-moving stories affecting investor sentiment.  REUTERS/Lucas Jackson   TPX IMAGES OF THE DAY   PICTURE 1 OF 30 FOR WIDER IMAGE STORY "NYSE - UP CLOSE AND IN DETAIL". SEARCH "LUCAS EXPRESSIONS" FOR ALL IMAGES
A trader blows a chewing gum bubble as he works on the floor of the New York Stock Exchange shortly after the opening bell, in New York, June 15, 2015. REUTERS/Lucas Jackson TPX IMAGES OF THE DAY PICTURE 1 OF 30 FOR WIDER IMAGE STORY "NYSE - UP CLOSE AND IN DETAIL". SEARCH "LUCAS EXPRESSIONS" FOR ALL IMAGES

The markets had a wild ride in 2020, briefly going into a bear market after COVID-19 lockdowns were set in place. Soon after they recovered as the Federal Reserve made unprecedented moves to support the economy, and Congress passed a stimulus bill.

“I am not at all surprised that since the summer the market has advanced at an accelerating rate and with increasing speculative excesses,” wrote Grantham.

“But today’s wounded economy is totally different: only partly recovered, possibly facing a double-dip, probably facing a slowdown, and certainly facing a very high degree of uncertainty,” he added.

Yet the market is much higher today than it was last fall when the economy looked fine and unemployment was at a historic low. Today the P/E ratio of the market is in the top few percent of the historical range and the economy is in the worst few percent. This is completely without precedent and may even be a better measure of speculative intensity than any SPAC,” he wrote.

Grantham predicts the longest this bubble might survive is the late spring or early summer, which would coincide with the broad rollout of COVID-19 vaccines.

“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,” he wrote.

He notes today’s market features extreme disparities in value by asset class, sector, and company. He highlights value and emerging market stocks as a place to hide.

“We believe it is in the overlap of these two ideas, Value and Emerging, that your relative bets should go, along with the greatest avoidance of U.S. Growth stocks that your career and business risk will allow,” he wrote.

Ines covers the U.S. stock market. Follow her on Twitter at @ines_ferre

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