Investor Jeremy Grantham made strong predictions for the stock market and US economy in his latest GMO letter.
While the S&P 500 (SPX) closed at 3840 on Dec 30, 2022, down 960 (20%) from its 4800 year ago peak, if Jeremy’s prediction that the SPX may hit 3200 by the end 2023 it would need to fall by 16.7% or 640 points from 3840.
As of the date I was recording this video, the SPX was at 4145, which is up by 305 or 7.95% from the end of 2022. To drop from current levels would be 945, or 22.8% to reach 3200 by the end of 2023.
Overall, Jeremy is predicting the market’s ultimate bottom could be at just shy of 2000 points, or the same as if it lost 2800 from 4800 (the peak at end 2021) or 58.3%, which is well within the realm of possibilities if peak to trough is -50-60%. However, it could take more than 2 years from the end of 2021 until sometime in 2024 before we potentially see this happen.
Jeremy shared a chart of how the stock market bottom often happens a long time after the Federal Reserve (Fed) begins to cut rates in anticipation of a recession.
Economists are projecting that the final Fed rate hike of 25 basis points will lead to a range of 5-5.25% in May 2023 and then, presuming a recession is on the horizon, by September or November 2023 there might be a rate cut back to 4.75-5% (which is where it was in April 2023).
I extrapolate from Jeremy’s writing that if a recession starts by late July 2023 or late Jan 2024, then the stock market bottom might respectively happen by either Feb/Mar 2024 or Aug/Sep 2024. If Jeremy is right that the S&P 500 could reach 2000, we have more than halfway down to go in the stock market.
Another trend is that a stock market bottom lags the start of recession by an average of 7 or 8 months, but some bottoms can take 11, 15, and 19 months with 1972, 2000, and 2006.
Jeremy also discussed the impact of the Presidential Cycle where “for 7 months of the Presidential Cycle, from October 1st of the second year (this cycle, 2022) through April 30th of the third year (2023), the returns, since 1932, equal those of the remaining 41 months of the cycle!” So it’s possible that the stock market begins its gradual decline in May 2023 after previously experiencing some decent bear market rallies.
He also said that US governmental stimulus led to “peak of excess savings at $2-3 trillion in late 2021. This excess savings balance has been slowly drawn down over the course of 2022, but less than half now remains. Once it runs out, by some estimates around mid-year, this particular support for the economy will be gone.” If people need to cash out of their investments or savings to pay off debts, this cushion may not hold up the market as much despite people HODLing in 2022.
The most important takeaway was that as of January 2023, Jeremy and team believed “a recession will likely not start for 6 months to a year, you can see how easily we can conclude that the final low for this market might be well into 2024.”
This possibility doesn’t inspire me to want to invest too heavily right now, but bide my time and keep learning about investing until US stocks really go on sale. However, if you want non-negative returns, Jeremy encourages people to consider emerging markets’ value stocks.
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