Stock market downturn expected to worsen, valuations remain above average, investors advised to be cautious.
Jeremy Grantham, the co-founder of Boston-based investment firm GMO, has warned that the worst of the bear market in U.S. stocks may still lie ahead. Grantham argued in a Tuesday paper that the “first and easiest leg of the bursting of the bubble” is complete, with the most speculative growth stocks that led the market on the way up “crushed” and a “large chunk” of expected losses already occurring. He estimated that the trend line value of the S&P 500 index, adjusted upward for trend line growth and expected inflation, will be around 3,200 by the end of 2023. A drop to this level would mark a 17% fall for the year and a drop of around 20% from the S&P 500’s Tuesday finish at 4,019.81.
Grantham noted that while such an outcome is highly likely, investors should have far less certainty about the timing and extend of the market’s next leg down. He highlighted the “underrecognized and powerful Presidential Cycle” and other factors like subsiding inflation, the ongoing strength of the labor market, and the reopening of the Chinese economy, which could lead to a pause or delay in the bear market. He also warned of long-run issues of declining population, shortages of raw materials, and rising damage from climate change, which could further exacerbate the situation.
Overall, Grantham’s outlook is that the bear market is far from over and that the market could see a further downturn of up to 50% in the next 12-18 months. He cautioned investors to be aware of the risks posed by the Presidential Cycle, as well as the long-run economic issues that could lead to a further deterioration of corporate fundamentals. As such, investors should be prepared for the possibility of a significant drop in the market over the coming months.
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