Jeremy Grantham, chief investment strategist at Grantham Mayo Van Otterloo & Co., said the Standard & Poor’s 500 will climb above 2,250 before collapsing after the next U.S. presidential election.
“Around the election or soon after, the market bubble will burst, as bubbles always do, and will revert to its trend value, around half of its peak or worse,” Grantham, 75, wrote in a quarterly letter released today.
Grantham, who is best known for his bearish calls on U.S. stocks in 2000, is a long-time critic of the Federal Reserve, which he blames for creating asset bubbles by holding interest rates at artificially low levels. Grantham, in his letter, said the S&P 500 Index, currently at 1,886, is already 65 percent overvalued. Reaching the 2,250 is significant, he argues, because that would make the stock market roughly as overvalued as it has been in the past when bubbles burst.
In an accompanying letter, Edward Chancellor, a strategist at the $117 billion firm who predicted the bursting of the last credit bubble, said the market is vulnerable based on sentiment indicators.
“Anyone who bought U.S. stocks in the past when sentiment was at today’s elevated level, has lost money, on average,” he wrote. “That’s to say, the S&P 500 has generated negative real returns over one-, three- and seven-year periods.”
In 2000, Grantham correctly predicted that U.S. stocks would lose money in the next decade. The S&P 500 declined an average of 1 percent a year in the 10 years ended Dec. 31, 2009.
GMO predicts that large-cap U.S. stocks will decline 1.3 percent a year, adjusted for inflation, over the next seven years, according to the Boston-based firm’s website. Small cap stocks will lose 5 percent annually over the same stretch.