Brace for the S&P 500 to plunge 50% and a painful recession to strike as the 'everything bubble' bursts, elite investor Jeremy Grantham warns

Jeremy Grantham.REUTERS/Nicholas Roberts
  • Jeremy Grantham expects stocks to plunge and a recession to hit as the "everything bubble" bursts.

  • The investor warns the S&P 500 could halve in value to around 2,000 points in a worst-case scenario.

  • Grantham advised against betting on US stocks for the short term, and touted emerging markets.

Jeremy Grantham has warned the implosion of an "everything bubble" could tank the S&P 500 by up to 50%, and plunge the US economy into a painful recession.

The prices of stocks, bonds, real estate, fine art, and other investments ballooned to unsustainable highs during the pandemic, Grantham said. The market historian and GMO cofounder shared his thesis with economist David Rosenberg during a recent Rosenberg Research webcast.

The current bubble is "pretty damn big" compared to previous ones, and dwarfs the dot-com boom in scope, Grantham said.

"It's bad enough just doing the equity market in 2000," he said. "This time, we have done a dead ringer for the equity market, plus the gravy, we've done the housing market and the bond market."

"Be advised this is not a genteel setback like 2000," Grantham continued, predicting a bear market could persist until deep into next year. He noted the dot-com crash only caused a mild recession, but even so, the Nasdaq index plummeted 82% and the S&P 500 halved in value during that period.

The bubble expert predicted that if the US gets lucky, the S&P 500 might slump by around 24% to roughly 3,000 points. If events pan out poorly, the benchmark index could tumble below its pandemic low to around 2,000 points, he warned.

Grantham said a recession is inevitable when a "superbubble" pops, and the ensuing downturn is worse when the speculative frenzy affects multiple asset classes.

He also nodded to the current banking crisis, noting that US credit markets might come under pressure from high levels of debt and rising interest rates. That could worsen the fallout from the asset bubble bursting, he said.

The veteran investor predicted rising unemployment, slowing growth, and slimmer corporate profit margins from May onward. But he emphasized that economic fundamentals can deteriorate for years before they finally bottom out.

Grantham also offered some advice to investors on how to weather the coming storm. He cautioned against short-term wagers on US stocks, touted emerging markets as relatively cheap, and recommended betting on long-term trends such as climate change and resource shortages.

"If you want to have US equities because you have to, then for heaven's sake, play the long game and do resources and climate change, and pretty well stay away from everything else," he said.

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