The popping of the bubble in U.S. stocks is far from over and investors shouldn’t get too excited about a strong start to the year for the market, warns Jeremy Grantham, the co-founder and long-term investment strategist of GMO.
In fact, the 84-year-old money manager calculated that the value of the S&P 500 at the end of the year should be about 3,200, he says in a paper out Tuesday. That would equal an almost 17 per cent full-year drop and a 20 per cent decline for the year from current levels. Grantham believes the index is likely to spend some time below that level during 2023, including around 3,000.
“There are more things that can go wrong than there are that can go right,” he added. “There’s a definite chance that things could go wrong and that we could have basically the system start to go completely wrong on a global basis.” Value strategies struggled with lackluster returns in the decade following the global financial crisis as growth stocks led the longest bull market in U.S. stocks on record. But now, as the Federal Reserve tries to tame elevated inflation with aggressive interest-rate increases, value strategies are enjoying a revival.
As to what might be currently attractive, Grantham says an investor could divide value stocks into four quartiles. The third group — made up of “the pretty cheap” — did well last year and is no longer super attractive. But the cheapest quartile, which didn’t have the best year, could be poised to hold up best. “It will have a very good time,” he said.
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