Stocks fell 3% last week after Russia’s Gazprom said it would close the Nord Stream gas pipeline.
As GMO’s Jeremy Grantham argues in a new article ”Entering the Superbubble’s Final Act”, the stock market currently faces many problems simultaneously.
1. There is a worldwide commodity shortage made worse by the war in Ukraine. Europe, in particular, suffers from high natural gas prices, with some arguing that Germany’s growth model is broken.
2. The Chinese property market is under stress and it may be that China’s growth model, too, is broken.
3. Following extraordinary COVID largesse, governments are tightening their belts. This has historically led to contracting profit margins for companies.
4. Climate change is leading to a drag on global GDP due to droughts, fires and floods, while the resources needed to address it remain in short supply.
To Grantham’s concerns can be added the possibility of escalation of the war in Ukraine. If Russia does badly in the war, the chances that tactical nuclear weapons might be used rises.
Grantham notes that stock valuations have fallen, but in his view, the market is still expensive. Stocks should fall 30% from here to reach fair value, according to Grantham’s model.
We consider such an outcome entirely plausible in a negative scenario in which the global economy falls into a relatively severe recession. A 30% drop would mean that the $SPX500 would bottom at 2750, 15x recessionary earnings of $180.
Even in our base case, the $SPX500 could well reach 3000 next year, 15x earnings of $200.
We hardly ever see so many negatives piling up against stocks. The last similar time was in 2008. As a result, the portfolio is positioned very defensively, with the majority invested in USD cash.
The position in $JPST was increased.