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Jeremy Grantham, co-founder and chief investment strategist of GMO

Portfolio > Economy & Markets

GMO’s Grantham: ‘Don’t Invest in the U.S.’

By Dinah Wisenberg Brin

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What You Need to Know

  • The world outside the U.S. is investable, Grantham says.
  • The Russell 2000 is especially vulnerable, he notes.
  • Great bubbles take years to rise and years to fall, the strategist says.

The S&P 500 index could drop by 50%, Jeremy Grantham, GMO co-founder and investment strategist, said this week, recommending that investors avoid buying U.S. stocks.

He said he doesn’t expect the index to slide that far but considers it a possibility and does anticipate a major pullback.

Grantham warned in early 2021 that the market was experiencing “one of the great bubbles of financial history” and last year said that the “superbubble“ was entering its final act.

“In order to get the market down to a level where it would typically out-yield the long bond by 5% … the market would have to drop by more than 50%. This is not my forecast. I have a very genteel forecast that anything below 3,000 would make me think that it was reasonable,” Grantham said on Bloomberg’s Merryn Talks Money podcast.

“And if everything works out badly, which it sometimes does, I would not be amazed if it went to 2,000 on the S&P, but that would require a couple of wheels to fall off,” he added. “And wheels tend to fall off in the great bubbles unraveling, but it doesn’t mean they have to.”

The S&P 500 sat at 4,300 midday Friday, so a slide to 3,000 would represent a roughly 30% drop.

“The great bubbles take their time, quite a few years going up, quite a few years coming down and the market suffers from attention deficit disorder so it always thinks every rally is the beginning of the next great bull market,” Grantham said.

Russell 2000 stocks are particularly vulnerable, given the companies’ record debt, with about 40% lacking earnings, he suggested.

“The Russell 2000 almost has no collective earnings at all,” has record debt and includes zombie companies that can make interest payments only by issuing more debt, Grantham said.

The S&P 500 is about 18% below its highest close, in January 2022, and with 7% to 8% inflation, the market is down about 10%, the strategist said. “The markets are not doing as well as people think” because investors don’t account for inflation, he added.

A recession is coming and “it will probably go deep into next year,” Grantham projected, although he doesn’t know if it will be mild or serious. “Every bubble has been greeted with a chorus of soft landing, and there’s never been one.”

The market is unlikely to get more than a 3% return when the Shiller P/E ratio, or cyclically adjusted price-earnings ratio, reaches roughly 30, although the market expects twice that, Grantham said.

“Sooner or later, the simple arithmetic suggests you’ll either have a dismal return or you’ll have a nice bear market and then a normal return,” Grantham said. “And the nice bear market will be hopefully less than a 50% decline, but it won’t be a huge amount less from the peak than 50% in real terms.”

The strategist suggested that investors avoid putting their money in real estate and U.S. stocks, and he called global real estate “universally overpriced,” along with farms, forests and fine art.

“The world outside the U.S. was investable and is investable,” including Japan, most of Europe and the United Kingdom, he said, suggesting that investors do their research. The U.K. and Japan appear to be among the cheapest markets, he noted.

If Investing in U.S., Focus on Quality

Grantham went further.

“Don’t invest in real estate, don’t invest in the U.S., and if you have to invest in the U.S. … I would urge you to take a good look at quality,” he said. “Quality has been the mispriced asset for 100 years.” 

In the long run, for example, Coca-Cola does well, particularly in bear markets, Grantham noted.

“That’s a free lunch,” he said. 

Quality stocks offer less risk over time, less debt, lower volatility and bankruptcy risks, have moderately outperformed in the short and long term and aren’t very overpriced now, he noted.

Excluding the “magnificent seven” tech stocks that dominated this year’s market rally, the rest of the S&P 500 looks much like the rest of the world and is essentially flat this year, Grantham said.

It’s unclear, he said, how these tech giants will fare long term. Grantham noted that the successful “Nifty Fifty” stock group had no failures for 15 years before 1972, then several, like Avon, Polaroid, Exxon, Eastman Kodak and IBM, were seriously wounded. 

Those large-cap stocks “lost their magic and they lost their huge premium and they underperformed badly for a decade,” he said.

Grantham also predicted that climate change will outgrow the rest of the economy and dominate investing for the next several decades. Within five years, he said, oil demand will take a big hit because of the growth of electric vehicles, and ramping up wind, solar and battery storage will require significant upfront resources.

Photo: Bloomberg

Dinah Wisenberg Brin

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