The bear with temporary horns

On 24 Jan 2023 Jeremy Grantham wrote about his observations regarding economy and stock market (mostly the US one as measured with the S&P 500 index) in this good paper, with the first sentence in his executive summary: “The first and easiest leg of the bursting of the bubble we called for a year ago is complete.” Further down in his paper, he said that the bust in (particular the US) stock market is not going to be finished very quickly, but “There are some complicating factors that seem quite likely to drag this bear market out”. As a key reason he referred to the US Presidential Cycle, which he also explains in more detail and whose dynamics are actually quite interesting (maybe as inspiration for next time).

So far it is about comparing his prediction/hypothesis to what actually happened, and the two are not far off, which makes his reasoning more interesting one might argue.

A useful thing to follow this brief discussion and to see the context of his paper is to go to a financial markets news website (like Yahoo Finance) and have a look at the chart of the S&P 500 index. Pretend it is Jan 2023, look back in time in the chart and you will easily understand what Grantham talks about. Then, as we fast forward to today, we see that the S&P 500 index (which is not exactly representative for the broader US stock market) has recovered quite a bit from the drawdown in 2022. Why? The US Presidential Cycle effect (see above) may well have contributed to this. However, the other key factor is also well known: The sudden emergence of AI (!), which has contributed to the rise of the S&P 500 index (but didn't cause much change to the Russell 2000 index). Remember: ChatGPT, GPT-4, large language models etc., referred to in the newspapers largely as “AI” (as if AI hadn’t been around for the last several years). Anyway: Let’s see how long the AI party will last in 2023/24. Mr Grantham thinks that the S&P 500 won't defy gravity, despite the buzz around the recently discovered AI.

Now, as a timely top-up to above very eloquently written, insightful short paper from Jeremy, I recommend the Spotify podcast episode titled “Jeremy Grantham Says No One Should Invest in the US” from the series Merryn Talks Money, from 5 Oct 2023, i.e. fresh from last week. It’s equally insightful, up to date, and quite entertaining too.