Grantham predicted around the start of the year that benchmark stocks would plunge almost 50% in a historic collapse. The S&P 500 at one point in June dropped almost 25% from its January peak, before roaring back in the following two months. Yet US equities are tumbling yet again, falling on Wednesday for the fourth straight session, with prominent strategists like Morgan Stanley’s Mike Wilson among those cautioning investors that the market hasn’t hit bottom.
"You had a typical bear market rally the other day and people were saying, ‘Oh, it’s a new bull market,” Grantham said in an interview. “That is nonsense.”
To Grantham, the collapse of a super bubble comes in several stages. First, there’s a setback like the one in the first half of the year, then a slight rally follows. Finally, fundamentals break down, and the market reaches its low point.
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Grantham became famous for spotting and profiting from bubbles in Japan in the late 1980s, tech stocks at the turn of the century and in US housing before the 2008 financial crisis. Some of his other bearish predictions over the years have been wrong — or, at least, too early.
This time around, he pointed to near-term problems such as the impact of Russia’s invasion of Ukraine on Europe, which is grappling with food and energy crises, along with fiscal tightening and China’s persistent Covid issues. While rising inflation drove declines in the first half of the year, falling corporate profit margins will cause the next round of losses, he said.
“My bet is that we're going to have a fairly tough time of it economically and financially before this is washed through the system,’’ Grantham said. “What I don't know is: Does that get out of hand like it did in the ‘30s, is it pretty well contained as it was in 2000 or is it somewhere in the middle?"