Although major U.S. stock market indexes have retreated between nine percent and 15% so far this year, renowned investor Jeremy Grantham sees no stock market crash in 2016.
The co-founder and chief investment officer at GMO believes the stock market will recover from its recent slump and rally into a bubble—and then bang.
Grantham anticipates that this year “an ordinary bear market lasting a few months, not a major collapse” may occur. A bear market is a 20% decline over a two-month period, for many. (Source: “Part II: 2015 and 2016, U.S. Equity Bubble Update, and Yet More on Oil,” GMO Quarterly Letter, February 2016.)
“Sure, we can have a regular bear market. That is always the case. But the BIG ONE? I doubt it,” he wrote. “Looking to 2016, we can agree that uncertainties are above average.”
Although there is no evidence of a growing market bubble, which precedes a major market collapse, Grantham admitted to “feeling nervous” for this year’s equity outlook in the U.S.
Grantham defines “bubble” as the S&P 500 advancing to near 2,300. That’s about 25% above the index’s current level.
Grantham said he thinks that in 2015, the Fed approximately offset the year’s “three very large negatives: China, oil, and declining margins, which together caused disappointing global growth.”
China recorded a growth rate of 6.9% last year, contributing more than 25% of global economic growth. The world’s second-largest economy was outpaced by the Indian economy, which grew 7.5% in 2015, official figures showed on Monday.
Oil prices have plummeted from above $100.00 a barrel in mid-summer 2014 to trade around $30.00 this month.
Grantham said he still believes that “with the help of the Fed and its allies, the U.S. market will rally once again to become a fully-fledged bubble before it breaks… That is, after all, the logical outcome of a Fed policy that stimulates and overestimates some more until, finally, some strut in the complicated economic structure snaps.”
“Good luck in 2016,” he concludes.