- Jeremy Grantham explained why the stock market is in a meme-fueled bubble during an interview with Bloomberg on Tuesday.
- Grantham pointed to stretched valuations, commission-free retail trading, and cryptocurrencies to back up his view.
- The legendary investor also shared the valuation level that would make him feel comfortable buying stocks again.
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Legendary investor Jeremy Grantham reiterated on Tuesday his view that the stock market is in a massive bubble as part of a lengthy interview with Bloomberg Opinion columnist John Authers.
From stretched valuations to investing in actual jokes, Grantham sees the current bubble as over extended and called the last 12 months a “classic finale to an 11-year bull market,” according to the interview.
“Peak overvaluation across each decile by price to sales, so that the most expensive 10% [of the stock market] is worse than it was in the 2000 tech bubble and the remaining nine deciles are much more expensive,” Grantham explained.
The market historian pointed to record levels in speculative indicators like individual trading volumes in call options and penny stocks as reason to believe that the market is currently in a bubble.
“Robinhood and commission-free retail trading have driven a surge of new investors with no experience of past bubbles and busts. So the scale of craziness is larger,” Grantham said, before adding that the $1+ trillion valuation of cryptocurrencies represents “pure dilution.”
“Dogecoin was created as a joke to make fun of cryptocurrencies being worthless, and not only has it taken off, but it’s such a success that second-level joke cryptocurrencies making fun of dogecoin have gone to multibillion-dollar valuations,” Grantham explained.
Grantham went on to call “meme-investing,” or gambling on a stock simply because it’s funny, a “nihilistic parody of actual investing,” according to the interview.
“This is it guys, the biggest US fantasy trip of all time,” Grantham said.
Despite Grantham’s belief that the stock market is currently in a bubble, he did explain when and how he would return to the market and be a buyer of stocks.
“Getting back in is technically easy but psychologically difficult: start to average in as the market reaches more reasonable levels, say 18x earnings,” Grantham said.
The S&P 500’s trailing 12-month price-to-earnings ratio currently stands at about 30x, while the S&P 500’s forward price-to-earnings ratio is around 22x, according to data from FactSet.
Until the US stock market hits those valuation levels, Grantham has his eye on emerging market stocks and value stocks, according to the interview.
And as to when the stock market bubble may finally pop, Grantham said it’s difficult to predict because government stimulus programs and the successful vaccine roll-out “should make the bubble longer-lived and bigger.”
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