The US stock market is on the brink of a major bubble burst, according to Jeremy Grantham, a prominent investor and strategist. Speaking at an investor event in Sydney, Grantham warned that the soaring prices of American stocks, fueled by artificial intelligence (AI), have created a misleading impression of stability. He believes that the US economy is on the verge of unraveling, and a recession is very likely to follow.
Grantham has been sounding the alarm about this bubble since the summer of 2020, but the buzz around AI has delayed its deflation. Despite a stock market decline in 2022, investors have recently bet heavily on key AI players like Nvidia, Tesla, Alphabet, and Microsoft, leading to a rebound in stock prices this year.
However, Grantham advises caution, suggesting that overseas stocks appear less overvalued than their American counterparts. If investors do choose to invest in US equities, he recommends focusing on high-quality companies that are less indebted and more resilient to economic downturns.
Grantham also sees great potential in companies working to combat climate change. He expressed his enthusiasm for climate-change stocks, citing their strong revenue growth, similar to that of Tesla and other electric vehicle companies.
On the other hand, Grantham advises staying away from the housing market due to the high multiples driven by two decades of declining mortgage rates across many developed nations. He warns against the unpredictability of commodities as well, suggesting that investing in them requires strong nerves.
When asked about the probability of a US recession within the next 18 months, Grantham estimated it to be over 50%, narrowing it down to around 70%. While inflation has eased from its historic high, many hope that the Federal Reserve will reverse its interest-rate hikes to relieve pressure on the economy. However, Grantham believes that the Fed and other economic and financial establishments consistently underestimate the probability of a recession.
Goldman Sachs sees only a 15% chance of a recession in the next 12 months, and the Fed’s staff economists share a similar sentiment. But Grantham emphasizes that it is inevitable to have economic problems and believes it would be unique if the US doesn’t face an extended economic issue.
In conclusion, Jeremy Grantham’s warning of an imminent stock market bubble burst and a likely US recession highlights the need for caution among investors. While some remain optimistic about the economy’s stability, Grantham urges vigilance and selective investment choices to navigate through these uncertain times.
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