Jeremy Grantham has a reputation as one of the investment world’s best forecasters. The co-founder of GMO, which manages more than $120bn, was alert to the housing bubble – “a train wreck in very slow motion”, he called it – and also pinpointed the turn of the US stockmarket in March 2009.
Having spent much of his time studying bubbles, he has concluded that “despite brutal and widespread asset overpricing”, US stocks haven’t quite reached bubble territory; that would imply a level of around 2,300 in the S&P 500 index. And while he believes that this central-bank-induced market rebound looks due for a substantial fall in the next few years, for now he expects “it will hang in or better – at least through the election”.
The fundamentals are uninspiring: productivity, growth and profit margins have disappointed. But stocks are being given an artificial fillip from near-zero interest rates, courtesy of the Federal Reserve and widespread share buybacks. Meanwhile, the economy retains enough spare capacity to “grow moderately for a while”.
Nor is sentiment wildly bullish, as it typically is before big declines, such as the 50% falls in 1972, 2000 and 2007. There could well be “an ordinary bear market of 10% or 20%”, but a “serious decline” is unlikely for now. So while the next president will face a daunting array of problems, a market collapse is probably not going to be among them.
The bigger question, however, is what will ultimately happen now that central banks have driven interest rates down to zero and beyond, an unprecedented situation whose long-term consequences are impossible to predict. “We live in interesting times.”