Legendary investor Jeremy Grantham recently warned investors of a potential stock market crash in his 2023 outlook letter.[0] According to Grantham, valuations are still nowhere near their long-term averages and he believes it is likely (3 to 1) to reach a trend of 3200 on the S&P 500 by the end of 2023.[1] In the worst case, if something breaks and the world falls into a severe recession, the market could fall a stomach-turning 50% from here.[2]
This sentiment is echoed by a Finnish economics professor and researcher from the University of Vaasa, Klaus Grosby. In a recent paper titled “Armageddon of Financial Markets: Is the US equity market eventually going to collapse?”, Grosby pointed to extraordinary events that have rattled markets over the past decade, including the 2008 financial crisis, the pandemic, and the Russia-Ukraine war, which rocked global financial markets since last year.[3]
Grosby experimented with the same model by utilizing the S&P 500 stock market data from the last two decades, which took into account the dot-com bust, the 2008 economic crash, and the 2020 recession brought on by the pandemic, which all resulted in a sharp decline in the stock market.[4] He further adjusted the model, as other research suggested it might be overestimating how long it takes for a stock market crash to take place.[4] Grosby suggests that the “extreme monetary policies” of the central bank in the past may have hastened the arrival of a financial crisis.[4] He likened the impending crash to the occurrences of 1987 and 1929.[4]
Given the current state of the stock market and the potential for a stock market crash, investors should be cognizant of the potential long-term implications and act accordingly.[5] While it is difficult to predict the exact timing of a potential market decline, it is important to be aware of the potential downside risk and be prepared to make adjustments to portfolios as necessary.
0. “Wall Street prophet Jeremy Grantham predicts another stock market crash” The Times, 30 Jan. 2023, https://www.thetimes.co.uk/article/wall-street-prophet-jeremy-grantham-predicts-another-stock-market-crash-fk0v00j7g
1. “Legendary investor Jeremy Grantham warns stocks could drop another 50% this year—but he doesn’t say to stay away from markets entirely” Yahoo! Voices, 30 Jan. 2023, https://www.yahoo.com/now/legendary-investor-jeremy-grantham-warns-173553990.html
2. “Jeremy Grantham warns of a massive stock market crash in 2023 outlook” Markets Insider, 29 Jan. 2023, https://markets.businessinsider.com/news/stocks/jeremy-grantham-stock-market-crash-warning-2023-bubble-outlook-2023-1
3. “An economics researcher is warning that the next few decades could bring a massive stock market collapse” msnNOW, 4 Feb. 2023, https://www.msn.com/en-us/money/savingandinvesting/an-economics-researcher-is-warning-that-the-next-few-decades-could-bring-a-massive-stock-market-collapse/ar-AA176z05?li=BBnb7Kz
4. “An economics researcher is warning that the next few decades could bring a massive stock market collapse” Yahoo! Voices, 4 Feb. 2023, https://www.yahoo.com/finance/news/economics-researcher-warning-next-few-133000909.html
5. “A top money manager thinks ANOTHER stock market crash is coming in 2023! Here’s what I’d do” Motley Fool UK, 4 Feb. 2023, https://www.fool.co.uk/2023/02/04/a-top-money-manager-thinks-another-stock-market-crash-is-coming-in-2023-heres-what-id-do/