The party’s over on Wall Street as the stock market’s massive runup since 2009 has now turned into a “fully fledged epic bubble,” billionaire investor Jeremy Grantham said.
The S&P 500 has skyrocketed nearly 450% since its financial crisis closing low on March 9, 2009, reaching levels not before seen.
Between 2009 and 2020, the broader-market index posted annual gains on nine occasions, including three years of returns greater than 20%. In 2020, the S&P 500 recovered from a drop of more than 30% to end the year up 16.3%, trading at an all-time high.
But Grantham, the co-founder of GMO, thinks the market’s high valuations, sharp price increases and “hysterically speculative investor behavior” are signs that the market is now in a historic bubble.
Grantham has a history of correctly spotting market bubbles, calling the 2008 market downturn and the dot-com bubble bursting in 2000.
“I believe this event will be recorded as one of the great bubbles of financial history, right along with the South Sea bubble, 1929, and 2000,” Grantham wrote in a post. “Sooner or later there will come a time when an investor is pleased to have been out of the market.”
The S&P 500′s forward price-to-earnings ratio, a widely used valuation metric on Wall Street, currently sits above 22, according to FactSet. That’s below a September high of 23.91, but still near its highest level in about two decades.
That high valuation came as analysts trimmed their earnings estimates due to the coronavirus pandemic and its impact on the global economy. Still, investors have loaded up on equities amid optimism around multiple coronavirus vaccines along with unprecedented fiscal and monetary stimulus.
“Today the P/E ratio of the market is in the top few percent of the historical range and the economy is in the worst few percent,” Grantham added. “This is completely without precedent and may even be a better measure of speculative intensity than any SPAC.”
Grantham also pointed to the highly speculative behavior displayed by retail traders and investors over the past year, citing Hertz, Kodak, Nikola and Tesla as “examples of mania.”
Those stocks all saw sharp gains at various points in 2020. In Hertz’s case, they came after the car-rental company had declared bankruptcy. He also noted that Tesla’s market cap, now above $600 billion, amounts to over $1.25 million per car sold compared with $9,000 per car sold by General Motors.
Grantham also noted that the number of call-option retail purchases increased eightfold in 2020 when compared with 2019.
“All bubbles end with near universal acceptance that the current one will not end yet,” he said.
A woman wearing a dress made of cash, Germany, 1923.
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