The bear market in U.S. stocks is not done yet


One year ago investment expert Jeremy Grantham used his experience and knowledge from a 55-year career in investment management to predict that a new bear market in stocks had begun. He was right as the stock market in the U.S. declined about 20 percent over the following year.

One year on, Grantham has an update on the progress of the bear market. Is it over?

In his piece from a year ago, which I reviewed here. Grantham says that the bubble in stocks is a 3-sigma event, or what he calls a superbubble. Sigma or standard deviation is a statistical term that measures how far from the mean (average) a particular observation is. At 3-sigma an event is not expected to happen more than once in a hundred years. But, as Grantham points out, we have seen 3 such events going back to 1929.

As he predicted in “Let the wild rumpus begin” the stock market was ready for a correction. It did not need the Russia/Ukraine war or even the surge in inflation to 10 percent annually to start that correction. It was, and still is, valuation that was the problem and extreme valuation always gets corrected back to the long-term trend line or even lower for a time. This happened with stock markets after 1929 in the U.S., after 1989 in Japan and after 2000 in the U.S. And, Grantham contended, a year ago we had a 4th superbubble in U.S. stocks.

The new report “Back to the meat grinder” January 24, 2023 points out that this bear market has been brutal for the valuation of some of the largest capitalization high-flying U.S. stocks. He mentions Alphabet (Google), Amazon and Meta (Facebook) as prime examples. Stocks, bonds and even crypto currencies have seen losses in the trillions. Real estate is on its way to a bear market although in some parts of the U.S. and Canada the housing market is holding up better than expected.

The second phase of the bear market will be complicated. The markets will not go straight down as we are seeing in the explosive rally this month. Some people will see a new bull market as they feel that -20 percent is enough of a shakeout. But valuations have not come down enough, at least in U.S. stocks, to reach the long-term trend line. Here’s Grantham:

“My calculations of trendline value of the S&P 500 … is about 3200 by the end of 2023. I believe it is likely (3 to 1) to reach that trend and spend at least some time below it this year or next … 3200 would be a decline of just 16.7% for 2023 and with 4% inflation assumed for the year would total a 20% real decline for 2023 – or 40% real from the beginning of 2022.”

If Grantham is right, now is not the time to be venturing into the market to buy the dips. Further declines are likely.


Hilliard MacBeth


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