The stock market is about to go “back to the meat grinder” this 12 months despite a recent minor rally, with the broad-based S&P 500 potentially plummeting by 50% in a worst-case scenario, famed investor Jeremy Grantham warned Tuesday.
Grantham, the 84-year-old co-founder of Boston-based asset management firm GMO, told clients in a letter that the “first and easiest leg of the bursting of the bubble” in US stocks is now “complete,” with “probably the most extreme froth” worn out during last 12 months’s selloff.
Under his projections, the S&P 500 would plunge by about 17% to roughly 3,200 for the total 12 months of 2023, or about 20% after early gains available in the market thus far this 12 months. However the final result might be far worse if the worldwide economy topples into a major recession, in line with Grantham.
“Regrettably there are more downside potentials than upside,” Grantham wrote. “Within the worst case, if something does break and the world falls right into a severe recession, the market could fall a stomach-turning 50% from here. At best there may be more likely to be no less than an additional modest decline, which certainly not balances the risks.”
Grantham cited several aspects that may lead to more pain for investors, including a serious correction within the US housing market and lingering uncertainty in regards to the final result of the Russia-Ukraine war.
The S&P 500 is up about 5% thus far this 12 months.AFP via Getty Images
A decline of fifty% would take the S&P 500 below 2,000 points, down from its current level of just over 4,000.
“To place this in perspective, it could still be a much smaller percent deviation from trendline value than the overpricing we had at the tip of 2021 of over 70%,” Grantham said. “So that you shouldn’t be tempted to think it absolutely cannot occur.”
The S&P 500 has rallied about 5% this 12 months in an indication of cautious optimism amongst investors in regards to the economic outlook. That’s despite a wave of layoffs hammering the tech sector, including giants resembling Microsoft and Amazon.
The S&P 500 fell greater than 19% last 12 months.Bloomberg via Getty Images
Last 12 months, the broad-based index plunged greater than 19% as Federal Reserve rate hikes and decades-high inflation sapped confidence.
Grantham asserted the precise timing of a possible downturn is difficult to evaluate, given some positive aspects that might prompt a “pause” within the bear market — including a historic trend of strong returns ahead of presidential elections, signs of cooling inflation, a sturdy jobs markets and China’s rebound from a surge of COVID-19 cases.
“How significantly corporate fundamentals deteriorate will mean all the pieces in the course of the next twelve to eighteen months,” Grantham added.
Known for his bearish outlooks, Grantham cautioned last September that investors faced “tragedy” when a current “super-bubble” in US markets bursts.