Don’t get too happy about the start-of-the-year rally, cautions co-founder of GMO Jeremy Grantham. In a recent paper, the well-known investment strategist predicts that U.S. stocks have further to decline and the S&P 500 will drop 17% by the end of the year, putting it at about 3,200, reports an article in Bloomberg. “There are more things that can go wrong than there are that can go right,” Grantham told Bloomberg in a subsequent interview.
Grantham is famously known as a Wall Street bear and said that he wouldn’t run out the S&P 500 tumbling all the down to 2,000. In the midst of aggressively-high interest rates and record inflation, value strategies have become popular once again, after a decade of underperformance. Grantham’s own GMO Equity Dislocation Strategy, a combination of long value equities and shorting companies with unrealistic valuations, gained almost 15% in 2022. “In the range of value versus growth, value is still much more attractively positioned than growth,” Grantham says, adding that value stocks could beat growth stocks by 20% for the next couple of years. Investors should consider dividing value stocks into four groups based on descending value; “the pretty cheap” third group, which did well last year, may no longer be attractive, but the fourth group—the cheapest—has the potential to do very well in 2023, he advised.
The short-term trajectory of the stock market will likely play out in much the same way that previous bubble bursts did, Grantham told Bloomberg. Though this particularly bear market had plenty of extenuating circumstances such as the pandemic, the Ukraine war, and red-hot inflation, the market was heading for a bubble burst anyway. While cyclical strength from the new year and the current political cycle will give the market a boost, even a small adversity could result in a steep decline. “[A]fter a few spectacular bear-market rallies we are now approaching the far less reliable and more complicated final phase,” Grantham wrote in his paper.