Guru watch: A last gasp for stocks

US stocks will end up in ”a fully fledged bubble”, says Jeremy Grantham of GMO.

Andrew Van Sickle
By
published
in Features

Jeremy Grantham of GMO "has a track record that's difficult to ignore", says Steven Russolillo in The Wall Street Journal. He foresaw the internet bubble and the housing bubble, and "almost perfectly timed" the market bottom in 2009. So what does he think will happen next?

The American stockmarket, already far from good value, will keep going up and end in "a fully fledged bubble", he says. That implies a level of "at least" 2,250 on the S&P 500, around 15% above current levels. The US Federal Reserve under Janet Yellen has made it very clear that it won't try to "head off or curtail any asset bubbles" by raising interest rates.

Instead it will stick to the Greenspan/Bernanke approach of simply propping up markets and the economy, even though we have been through two of "the most painful burst bubbles in history". This "affirmation of moral hazard" is encouraging speculation and fuelling the bubble.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free
https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

"A veritable explosion" of mergers and acquisitions (M&A) will accompany and reinforce stocks' last hurrah, reckons Grantham. The cost of debt is now lower compared to other deal frenzies, while profit margins are still high. "Not a bad combination for a deal maker." The economy, despite being in the sixth year of the recovery, also appears to have "enough slack to keep going for a few years".

Previous M&A booms came when economic cycles were "already showing their wrinkles" witness 2000 and 2007. But this time there seems plenty of scope for further growth. If I were a dealmaker ,"I would be licking my lips". Another factor likely to promote M&A is that there are practically no appealing investments left as yields are at rock-bottom levels. "All previous deal records are likely to be broken in the next year or two" as a "very dangerous" bubble re-emerges.

Andrew Van Sickle
Andrew Van Sickle
Editor, MoneyWeek

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.

Latest