Jeremy Grantham Calls “Epic Bubble”

One of my favorite themes here on Finance Gourmet is accountability. Accountability for your financial advisor, accountability for talking heads on money TV, accountability for analysts making “calls” about the market.

Too often, all of these predictions and calls are simply forgotten until one of them is “right” and then, they won’t shut up about it. I try, in my huge amounts of spare time (Hah!) to bring a little bit of accountability to the big names and headlines that fly by.

Today, it’s Jeremy Grantham.

stock market bubble
Does the stock market look like this?

Epic Bubble

Every article with the name Jeremy Grantham in it makes sure to “credit” him with predicting the housing bubble of 2007. Some also credit him with predicting the dot-com bubble of 2009. That’s pretty cool, but it is now 2021.

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What has he predicted in the last 11 years? Have any of those predictions been good … or bad?

Never mind that, the finance press says. He predicted those two things over a decade ago and now he says, “Epic bubble!” Print it!

Jeremy Grantham Track Record

First off, let’s give Mr. Grantham some credit. In January 2018, he predicted a “melt-up” in the stock market. He was right. His prediction went on to predict a bubble-bursting crash in the next six months to two years. We’re getting on to the end of that prediction, but at least he has been consistent. If the bubble pops early in 2021, I’m willing to give him full credit for being right on that prediction.

Next, lets give some huge kudos to Barron’s for these two paragraphs.

Grantham has been early to call other bear markets: GMO got out of Japan in 1987, two years before it peaked in 1989. For years, he has called the current market overvalued as it marched higher.

That has turned out to be premature. The S&P 500 closed up 16.3% for 2020, gaining just shy of 50% over the past two years, its largest two-year gain since 1999. The Dow Jones Industrial Average added 2068 points, or 7.3%, in 2020, while the Nasdaq Composite roared 43.6% higher last year. The small-cap Russell 2000 gained 18.4%.

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Barron’s goes on to mention that Grantham dropped his equity exposure from 55% to 25% in 2020. That move may turn out to be “right,” but he cost his investors a ton of money along the way. In June 2020, he mentioned investors moving to potentially 0% equities exposure.

That would have cost you a lot of money as well.

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In May 2019, he said there wouldn’t be a bubble at all, but rather a limping down. I like that call, but again… early.

There isn’t intrinsically an issue with being early. If you make a bubble call and then the market treads water for a few months before popping, then no harm, no foul. But, if you make a bubble call two years too early and your clients miss out on 25% up in the market, well… how much did you really save them?

If you take the 25% runnup as a minus, and a bubble pops with a 25% decline, that’s nothing more than breaking even (approximately). If you missed out on 2020, you missed out on 15%+.

Investing for 2021

As always, the best strategy for long-term investors is to have a well-diversified portfolio tailored to your goals and risk tolerance. In that case, you don’t need anyone to call a bubble or the end balance of the S&P 500 for 2021.

For your shorter-term investments, watch what is holding up this market very carefully. If one of this market’s pillars of success ends up failing, Mr. Grantham may just get his bubble.

This article is for informational purposes only and is not a recommendation to buy or sell any securities. Consult your financial and tax professionals for advice specific to your situation. At the time of publication, the author did not own any shares in any of the companies mentioned, although that could change at any time without notice. The author is not a financial advisor and does not hold himself out to be one.

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