Jeremy Grantham has warned that the bear market could continue and fall another 50% this year

The worst part of the stock market’s bearish turn over the past year may still lie ahead, and investors may need to brace for a sharper decline, according to long-term stock market trends. guru Jeremy Grantham.

The S&P 500, a benchmark for large US companies, is officially here bear market territory since June 2022, when stocks have fallen 20% from their previous high.

The Federal Reserve’s cycle of interest rate hikes to reduce inflation began to pressure markets last year. Periodic rally gives investors hope that the worst is behind them at different times of the year, but every improvement in the market is currently followed by a decline, and now one of the most famous Global investors warn not to hold your breath for the bear market to end soon.

The “first and quickest leg” of a stock market bubble burst is over, Jeremy Grantham, chief investment strategist at his own asset management firm GMO, wrote in a 2023 outlook letter was published last week.

Now comes the hard part. While the “gross froth” of speculative and risky stocks has been removed from the market over the past year, valuations for most assets remain well above their long-term averages, Grantham wrote, adding that high valuations tend to correspond to equally intense fixes. which would sink the market into the red.

“I believe continued economic and financial problems are likely,” he wrote. “A continued decline in the market of at least substantial proportions, although not the near certainty that it was a year ago, is more likely than not.”

Stocks will continue to sink in 2023

Hope the bear market is about to end continuously dashed because the Fed remains on course to raise interest rates, and for many investors, the question is how low the market will go before it ends.

Grantham’s predicted value for the S&P 500 at the end of 2023 is 3200, according to his letter, marking a 20% slide for the year and 40% from the market’s last peak in January of 2022. He put the possibility that it will reach the market. level three to one. In a worst-case scenario and if the market overcorrection is worse than expected, stocks could sink up to 50% from their previous peak.

Grantham warned of a “long list” of key economic negatives to watch that could worsen the market’s decline, including the US entering a recession or falling corporate profits. But Grantham’s list of risks is headed by a “bursting of the global housing bubble,” which Grantham wrote recently. Grantham points out how housing busts can be longer-lasting economic triggers than other equity crashes, while housing markets that were once considered “insurmountable,” such as Canada and australianbegan to decline under the weight of rising interest rates around the world.

Grantham’s predictions may be a tough pill to swallow for those encouraged by the January market surge. The S&P 500 is up nearly 6% year to date Monday after a month positive inflation news suggesting that an economic “soft landing” is possible, although Grantham, like other strategists, cautioned that this is not a sign that the bear market is about to end.

The rise in January will be another bear market rally, Morgan Stanley Chief investment officer Mike Wilson wrote in a research note last week, warning that investors should not be fooled that market momentum has returned. Like Grantham, Wilson wrote that the US is in the “final stages of a bear market” that can often be “most treacherous.”

Investors do not despair

In terms of timing, history suggests that while investors may not necessarily declare victory in a market downturn, this may be the final stage.

Since the end of World War II, every bear market has lasted on average less than 14 months from top to bottom, analysts at Glenmede, a wealth management firm, wrote in October. In 12 months, the end can be seen by investors. However, Grantham warned that the current market conditions could continue much longer than that, possibly “into 2024,” if the US falls into recession in late 2023.

The further market decline to come will be “pretty brutal” compared to the relatively poor market conditions of the past 20 years, Grantham wrote, though he also added that it would not be “the end of the world,” while pointing out that lots of possible silver. linings for investors on the fence.

He noted how stocks are a “whole lot cheaper” than they were a year ago, and investing today can still ensure returns that are more positive than investors who put their faith in the market in last year.

And while the list of negatives plaguing the economy is long, Grantham points to several factors that could turn markets positively. Corporate earnings haven’t declined much, he wrote, while the reopening of the Chinese economy and the economic effects of presidential cycles are likely to see stocks rise in the first few months. in the third term of the president, may lead to a “stop or delay in the bear market.”

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