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The S&P 500 is likely to crash by 30%, and could nosedive by over 50%, Jeremy Grantham has warned. He also predicted that US house prices will slump and a recession will strike next year, and dismissed bitcoin as a con.
"Anything below 3,000 would make think that it was reasonable," the veteran investor said about the benchmark stock index during the latest episode of Bloomberg's "Merryn Talks Money" podcast. The S&P 500 would have to plunge by almost a third from its current level to reach the 3,000-point mark.
"I would not be amazed if it went to 2,000 on the S&P, but that would require a couple of wheels to fall off," Grantham continued, implying that stocks could plummet by as much as 53%.
"Wheels tend to fall off in the great bubbles' unraveling, but it doesn't mean they have to," he continued. "But it would be unlikely not to get to something close to 3,000 points on the S&P."
Grantham, the cofounder and long-term investment strategist of asset manager GMO, is a bubble historian who's known for making dramatic predictions. While he called the dot-com bust and financial crisis, the "superbubble" in stocks, housing, and commodities he diagnosed at the start of last year is yet to burst.
The markets guru said he's bearish on stocks because they're heavily overvalued, and have historically returned 5% more than 30-year Treasuries, which seems virtually impossible at their current levels. He underscored that the "Magnificent Seven" stocks — which include Apple, Tesla, and Nvidia — have accounted for virtually all of the S&P 500's gain this year.
"The simple arithmetic suggests you'll either have a dismal return forever, or you'll have a nice bear market and then a normal return," Grantham said. "The nice bear market will be hopefully less than a 50% decline, but it won't be a huge amount less from the peak than 50% in real terms."
Grantham also reeled off several reasons why he expects the American economy to contract fairly soon. Consumers have virtually exhausted their pandemic savings, the moratorium on student-loan payments has ended, the leading economic indicators are deteriorating, corporate credit is tightening, and the US government faces the prospect of paying onerous amounts of interest on its record amount of debt.
"My guess is we will have a recession," Grantham said. "I don't know whether it will be fairly mild or fairly serious, but it will probably go deep into next year."
The value investor also underlined that more than 40 years of rock-bottom interest rates have depressed mortgage costs and pushed up house prices in many countries. The Federal Reserve has now hiked rates from nearly zero to north of 5% since last spring in response to historic inflation, which has pushed US mortgages to two-decade highs of above 7%. The steeper mortgage rates will "drive down" house prices, Grantham said.
Grantham also touched on cryptocurrencies, which he's criticized harshly in recent years. "Bitcoin is of course an elaborate scam," he said.
