Jeremy Grantham has done better than most when it comes to the big calls. He warned that the housing bubble of the mid-2000s would burst, and turned positive on stocks in March 2009. The S&P 500 has gained 180% since then, and the upswing has also been unusually long. So is the return of the bear near?
This rally “will end badly”, reckons Grantham, but not for some time: the odds are that we are set for “a substantial and quite lengthy last hurrah”. The main reason to think so is the US Federal Reserve’s serial bubble blowing.
Ever since the Alan Greenspan era, the Fed has made clear that it wouldn’t interfere with bubbles, but “would try to reduce the pain of bubbles breaking”. Even before that, there was a belief that the authorities would tend to stimulate in the two years before a presidential election.
Greenspan slashed interest rates after the 2000 bubble burst, so stock prices hadn’t even returned to their long-term trend line before they doubled again in the 2003-2007 rally.
Money printing spurred the latest massive rally after the “Global Financial Crisis and its twin, the Great Bailout”. Investors are now so used to the Fed’s easy money that US stocks, already 65% overpriced, can keep rising.
Long-term value investors are always outnumbered by “momentum [investment] managers”, who just jump on bandwagons. There should be enough belief in the ‘Fed put’ to propel the S&P – following a possible pause for much of this year – beyond 2,250 before the next US presidential election. At that level, the market would be 100% overpriced, a level only exceeded in 2000.
Around the time of the next election or soon after, the bubble will burst, “as bubbles always do”. Stocks are then likely to fall to around half of their peak or worse, “depending on what new ammunition the Fed can dig up”.