The stock market is headed for a nasty surprise about the time of the next presidential election — a 50 percent (or more) plunge from its peak, says Jeremy Grantham, chief investment strategist of money management firm GMO.
He writes in his
quarterly letter to investors that stocks are 65 percent overvalued and says the bull market may already have ended. But it's more likely that after struggling from Feb. 1 to Oct. 1 this year, stocks will rise again, particularly through next April, Grantham explains.
"By then or in the following 18 months up to the next election — or, horrible possibility, even longer — [the S&P 500] will have rallied past 2,250, perhaps by a decent margin."
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That level represents a 20 percent gain from Monday's close of 1,884.66.
"Then around the election [November 2016] or soon after, the market bubble will burst, as bubbles always do, and will revert to its trend value, around half of its peak or worse, depending on what new ammunition the Fed can dig up," he notes.
There are plenty of doubters about stocks' strength at the moment. Indeed, Wall Street strategists are now more bearish toward stocks than at any time in the last five years, according to a measurement by Bank of America Merrill Lynch.
But that's actually good for the equities market, because it's a contrarian indicator, writes Savita Subramanian, head of equity and quantitative strategy for BofA, in a report obtained by
MarketWatch.
"Given the contrarian nature of this indicator, we remain encouraged by Wall Street's ongoing lack of optimism and the fact that strategists are still recommending that investors significantly underweight equities," she states.
"Even though the S&P 500 has risen by over 35 percent since sentiment bottomed in 2012, history suggests that strong equity returns can last for years after the indicator troughs."
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