British investor Jeremy Grantham correctly predicted the dotcom crash in 2000 and the financial crisis in 2008. Now this spotter of asset bubbles is warning that another stock market crash is on the horizon.
The low point, Grantham says, might not arrive until “deep into next year.” But that worst-case nadir could be a 50% drop from current levels!
Now, he’s specifically talking about the S&P 500 here. But as the popular saying goes: “When America sneezes, the world catches a cold.”
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So the UK market would almost certainly follow its US counterpart downwards.
I have most of my money invested in the stock market. What do I think of such an alarming warning?
Who is predicting?
First, whenever I hear such bearish predictions, I consider who’s making them.
In the case of Jeremy Grantham, we’re talking about an elite investor. He’s the co-founder and chief investment strategist of Grantham, Mayo, & van Otterloo (GMO).
This is a Boston-based asset management firm that had around $65bn in assets under management in 2021. You don’t operate at that scale without knowing a thing or two about the market.
However, according to Wikipedia, Grantham is known as “a contrarian investor and permabear“.
I should note that those two things don’t always go together.
For example, Warren Buffett is a famous contrarian investor who believes that the best time to buy stocks is when the market is gripped by fear. But he’s not a ‘permabear’ — an investor who’s almost permanently bearish about the future direction of the economy and market.
Indeed, Buffett is normally bullish on the outlook for the US economy. He has often said: “Never bet against America.” And he thinks the stock market is only going one way over time, which is up.
Of course, Grantham’s prediction may well come true next year. Or it may not. Even a stopped clock is right twice a day, as they say.
Nevertheless, at some point, another stock market crash will happen. And that’s why I keep a watchlist.
Waiting for attractive entry points
I keep a separate list of shares that I’d like to buy (or own more of), but which I think are a bit pricey right now.
Top of my list in the US is Nvidia, a world leader in artificial intelligence computing. I’d love to buy more of these shares, but not while they’re trading at over 100 times earnings. That’s a nosebleed multiple, even for a company as great as I think this is.
But a stock market crash would likely blow the froth straight off that valuation. Then I’d happily top up my position.
Moving on to the FTSE 100, I like credit data giant Experian. Again, it’s a stock I own, but one I’d like to buy more of. Yet it currently has a price-to-earnings (P/E) ratio above 30. That’s about double the market average. So I’ll wait patiently for a better entry point.
Obviously a stock market crash would be the perfect time to complete my shopping list. The thing is that nobody really knows for sure when the next crash will happen.
But by keeping a fair bit of cash in my portfolio, I’m fully prepared to take advantage of one whenever it arrives.
