In his 2023 outlook letter, legendary investor Jeremy Grantham warned investors about a possible stock market crash. This was published Tuesday.
In his bear case scenario, Grantham warned of a possible 50% drop in stock market valuations this year. He believes that current valuations are still too high despite last year’s 20% decline. Grantham’s base case scenario predicts that the S&P500 will fall 20% to 3,200 by year’s end.
He did not dismiss the bearish outlook but said there were certain parts of the market that investors should own. These are his seven favorite quotes:
1. Stock market valuations
Grantham stated that while the market has seen the worst of the froth, the long-term average valuations remain unchanged. “I calculated the trendline value for the S&P 500 adjusted upwards for trendline expansion and expected inflation to be around 3200 by 2023. It is probable (3 to 1) that we will reach this trend and spend some time below it in the next year.
2. What could stop a bear stock market
“The possibility of a pause in the bear market is possible due to a variety of factors, including the powerful and under-recognized Presidential Cycle, as well as the subsiding inflation and continued strength of the labor force and the reopening Chinese economy.
3. The long-term outlook of stocks
“The most important picture is that long-term issues such as declining population, shortages of raw materials, and rising damages from climate change are starting to bite hard at growth prospects… Over the next few years, due to the change in interest rates, the possibility for a global downturn in property markets poses terrifying risks to the economy.”
4. The housing market
“The global housing bubble burst, which is just beginning, will likely have a more severe economic knock-on effect that the decline in equities. Housing busts seem two- or three-times longer than equities. From 2006, for example, it took six years for the U.S. to reach a bottom. Additionally, housing is more directly integrated into the economy through construction starts and associated spending than equities.
5. Stocks in the worst case
“Bearing in mind the downside, there are more upside potentials than upside. If something breaks and the world plunges into severe recession, it could lead to a market collapse of 50%. Even a 50% drop from here would still leave us just below 2000 on the S&P. This is 37% less than the current level. This is a much smaller deviation from the trendline value than what we experienced at the end 2021, which was over 70%. Grantham stated that it is impossible for it to happen so don’t be fooled.
“If we believe that a recession won’t start for six months to one year, we can conclude the market’s final low could be in 2024.”
6. On timing a potential stock market decline
There are some complicating factors that could drag out this bear market. Important fact: For 7 months of this Presidential Cycle (October 1st, 2022 through April 30th, 2023), the returns have been equal to those of the previous 41 months. This positive influence could help support the market for a few months more.
7. What to invest in the stock market going ahead
Grantham stated that despite the unattractive nature the U.S. equity markets and the complicated global economy, there are still surprising numbers of good investment opportunities. Emerging markets are reasonable priced and the value sector is cheap.
“For those who have a longer time horizon, say five years, stocks related to climate change and increasing pressure on many raw material will have a significant advantage over the rest. This is because the governments and corporations around the world are beginning to recognize the urgency of these issues.