Jeremy Grantham, a legendary investor, cautioned investors of a potential stock market catastrophe in his 2023 outlook letter, which was just recently published.
In his worst-case scenario, he predicted a 50% drop in the stock market this year, arguing that valuations are still too high even after last year’s 20% drop. According to Grantham’s worst-case scenario, the S&P 500 will decline 20% to 3,200 by the end of the year.
Despite his negative perspective, he did add that investors should own some sections of the market. Here are the top seven quotes from his letter:
1. Concerning Stock Market Valuations
“While the most extreme froth has been removed from the market, values remain well below long-term averages,” Grantham added. “My forecast for the S&P 500 trendline value, adjusted for trendline growth and projected inflation, is around 3200 by the end of 2023. I feel it is very possible (3 to 1) that it will reach that trend and spend some time below it this year or next.“
2. What Could Avoid a Stock Market Bear Market?
“A number of reasons, notably the underappreciated and powerful Presidential Cycle, but also subsiding inflation, the continued strength of the job market, and the reopening of the Chinese economy, speak for the potential of a bear market stop or delay.“
3. Stock Market’s Long-Term Prospects
“The bigger picture remains that long-run issues such as declining population, raw material shortages, and rising climate change damage are beginning to bite hard into growth prospects… over the next few years, given the change in interest rate environment, the possibility of a downturn in global property markets poses frightening risks to the economy.“
4. In the Real Estate Market
“The bursting of the global housing bubble, which is just getting started, is likely to have a more terrible economic repercussion than the decline in equities… Housing busts appear to last two or three times as long as stocks – in the United States, for example, it took 6 years to hit a low in 2006 – and housing is more directly connected to the economy than equities through construction starts and associated expenditures.“
5. Stocks in the Worst-Case Scenario
“Unfortunately, there are more negative than positive possibilities. In the worst-case scenario, if something breaks and the world enters a deep recession, the market may drop 50% from here… Even a 50% drop from here would leave us at just under 2000 on the S&P, or roughly 37% lower. To put this in context, it would still be a much lesser percentage deviation from trendline value than the overpricing we saw by the end of 2021, which was over 70%. So you shouldn’t be persuaded to believe it can’t happen” Grantham explained.
“If we… believe that a recession would not likely begin for 6 months to a year… we can deduce that the last low for this market could be well into 2024.“
6. Concerning the Timing of a Likely Stock Market Drop
“There are certain complicated variables that appear to be dragging out this bear market… The significant point here is that the returns for 7 months of the Presidential Cycle, from October 1st of the second year (this cycle, 2022) through April 30th of the third year (2023), have equaled those of the remaining 41 months of the cycle since 1932… To summarize, this beneficial influence may help to sustain the market for a few more months.“
7. On What to Buy in the Stock Market in the Future
“Despite the generally unappealing nature of the US equity market and the extremely volatile global economy, there are still a surprising number of reasonable investment opportunities, even if they are not sensational… emerging markets are reasonably priced, and the value sector of emerging markets are cheap,” Grantham said.
“I believe stocks related to addressing the problems of climate change and the increasing pressure on many raw materials have a significant advantage over the rest of the economy as the world’s governments and corporations begin to accept the urgency of these problems for those with a longer horizon than average, say 5 years and above.“
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