Investing legend Jeremy Grantham had a stark warning for investors this week.
The GMO co-founder reiterated his grim outlook for stocks, and warned of a “fully-fledged epic bubble,” just days after the major U.S. indexes capped off a euphoric year and in a week when the S&P 500 rose above 3,800 for the first time and the Nasdaq surged to a new high above 13,000.
Grantham said an a letter titled “Waiting for the Last Dance” that stocks are careening away from fair prices amid an “hysterically speculative” market. He also added the Fed won’t be able to stop the looming crash.
“I’m doubling down, because as prices move further away from trend, at accelerating speed and with growing speculative fervor, of course my confidence as a market historian increases that this is indeed the late stage of a bubble,” Grantham wrote in the letter. “A bubble that is beginning to look like a real humdinger.”
He argued in the note that today’s bull market, born in 2009, “has finally matured into a fully-fledged epic bubble” that can be considered one fo the great bubbles in financial history, akin to the South Sea bubble and those of 1929 and 2000. “These great bubbles are where fortunes are made and lost – and where investors truly prove their mettle,” Grantham wrote.
“The single most dependable feature of the late stages of the great bubbles of history has been really crazy investor behavior, especially on the part of individuals,” Grantham continued, pointing to Tesla (NASDAQ: TSLA), which at a market value north of “$600 billion, amounts to over $1.25 million per car sold each year versus $9,000 per car for GM (NYSE: GM). What has 1929 got to equal that?”
Grantham isn’t alone in sounding the alarm bells.
Billionaire investor Carl Icahn also warned this week of the possibility of a significant fall for stocks on the horizon.
“In my day I’ve seen a lot of wild rallies with a lot of misplaces stocks, but there is one thing they all have in common,” Icahn said. “Eventually they hit a wall and go into a major painful correction. Nobody can predict when it will happen, but when that does happen, look out below.”
Long-time bear David Rosenberg also chimed in, saying this week that the stock market and bitcoin are in massive bubbles.
“Based on our [stock market] valuation work, we are anywhere from 20% to 30% overvalued based on a whole bunch of different metrics,” Rosenberg said. “What’s holding the boot together is basically zero interest rates. As long as rates remain where they are, unless we have a real dramatic pullback in economic activity, this bubble that we’re in is probably not going to burst any time soon. We have to understand though, we are investing in a bubble.”
But Grantham warned that the bubble could burst as soon as this spring.
“My best guess as to the longest this bubble might survive is the late spring or early summer, coinciding with the broad rollout of the COVID vaccine,” Grantham wrote. “At that moment, the most pressing issue facing he world economy will have been solved. Market participants will breathe a sigh of relief, look around, and immediately realize that the economy is still in poor shape, stimulus will shortly be cut back with the end of the COVID crisis, and valuations are absurd. ‘Buy the rumor, sell the news.’”