Jeremy Grantham issued a strong warning this week: the U.S. stock market is in a bubble and investing in it is “simply playing with fire.”
“I have been completely amazed,” the investing legend told CNBC on Wednesday. “It is a rally without precedent – the fastest in this time ever and the only one in the history books that takes place against a background of undeniable economic problems.”
Grantham, the co-founder and chief investment strategist at Grantham, Mayo, Van Otterloo & Co, says investors are ignoring reality as the “fourth ‘Real McCoys’ bubble” of his investing career forms in the market.
“The great bubbles can go on for a long time and inflict a lot of pain,” Grantham said, with the previous three bubbles he referred to being Japan in 1989, the tech bubble in 2000, and the housing crisis of 2008. “I think we know now that we’re in one. And the chutzpah involved in having a bubble at a time of massive economic and financial uncertainty is substantial.”
Grantham painted a dire picture of the investment landscape in the U.S., suggesting that rampant day trading by retail investors and speculative fervor around insolvent companies—including car rental company Hertz (NYSE: HTZ)—reflects a bubble that could be the largest in his storied investing career.
The U.S. is officially in a recession with millions unemployed, and corporate bankruptcies rising. While some positive data is beginning to roll in, including this week’s report of a record jump in retail sales last month, the numbers ultimately go to show the depth of the damage done by the economic shutdown to slow the spread of the coronavirus pandemic and emphasize that a full recovery is going to take a very long time.
When asked what level of exposure individual investors should have in U.S. stocks now, Grantham said, “I think a good number now is zero and less than zero might not be a bad idea if you can stand that.” Instead, he suggested that investors buy emerging markets and “throw the key away” for a few years.
According to the investing expert, the monetary stimulus from the Federal Reserve—whose balance sheet jumped from $4 trillion in March to $7.21 trillion just last week—and stimulus efforts from Congress to help Americans has been a factor in boosting equity values amid the crisis.
“Clearly, the Fed scattering money around has created a favorable environment,” Grantham said.