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I would expect that by the low that the s p would have declined by 50 uh from the peak in in real terms Jeremy Grantham just explained his stock market predictions for 2023 and his outlook for the next couple of years is pretty alarming Grantham believes that the first most predictable leg of the bursting of the bubble is complete but that the next phase is a highly uncertain one that he estimates could cause the stock market to decline as much as 70 in a memo that he wrote this month Grantham spoke about the numerous economic factors at play including the precarious Global housing market the inverted yield curve and many other factors any of which could be the Catalyst for a more significant stock market decline something he calls a poly crisis today I'm going to be breaking down Grantham stock market predictions and of course what it means for the average investor today first in his memo Grantham sets the stage for where we are currently in the economic cycle you might remember a few months ago that Grantham described the current environment as a Super Bubble something He's only seen happen four other times in the past 100 years he described a Super Bubble as occurring in four stages first the Bubble forms then some sort of setback occurs thirdly a temporary rally and then finally fundamental deterioration such as corporate profits declining and or a recession which drives the stock market to reach its low according to Grantham stage two is what we've seen play out over the course of 2022.
the most speculative unprofitable stocks have well and truly been crushed and more broadly a very large chunk of the declines have already occurred the S P 500 has fallen so much that a 33 increase would be necessary for it to recover its 2022 losses after accounting for inflation the NASDAQ of mostly Tech related companies is much worse needing to increase 61 to recover its losses and Grantham also pokes fun at Kathy Wood whose ETF Arc Innovation which held almost all of the highly speculative stocks that value investors were trying to avoid needs to five times in value just to recover its losses even large cap companies like Amazon alphabet and meta have to rise about 70 to 150 percent just to regain their 2021 Peaks at the beginning of 2022 Grantham was explaining the Super Bubble that he saw forming in the financial markets at the time he estimated that the total loss in stocks bonds and real estate could reach 35 trillion dollars in the US alone that would be 17 trillion from stocks 6 trillion from bonds and 12 trillion from the housing market and he was certainly correct that a large amount of wealth was about to be wiped out of the financial markets although his predictions were a lot more pessimistic than what we've seen play out at least so far instead of 17 trillion of losses in stocks it was about 10 trillion that was wiped off the value of U.S equities in the bond market he was pretty accurate estimating 6 trillion when it actually declined about 5 trillion cryptocurrency which he didn't initially account for lost 2 trillion dollars in 2022 but his big Miss was the real estate market which didn't budge even though the housing mark Market is the prediction that Grantham got by far the most wrong he still believes that it will fall significantly just with somewhat of a delay I'll talk a little bit more about this later in the video Grantham cites the Ukraine war surging inflation and the covert Supply bottlenecks as the three catalysts for the stock market decline that we saw in 2022 but that none of these were the actual underlying issue which caused the decline Grantham admits that he nor anyone would have actually been able to predict the specific economic events that happened and caused the stock market in 2022 but that the precarious nature of the market left it vulnerable to any number of economic factors influencing it negatively he said to prick these bubbles all you have to do is have investors question whether they're near perfect economic and financial conditions can indeed be extrapolated forever going on to stay almost any pin can prick such Supreme confidence and cause the first quick and severe decline these are just accidents waiting to happen the very opposite of unexpected while all the highly speculative stock market bubble has popped there are still quite a few unresolved economic problems which could cause further pain in the financial markets the housing market which is typically slower to react hasn't fully rolled over yet the economy isn't in recession yet and corporate profits are still holding up reasonably well although any of these factors could deteriorate in a meaningful way Grantham thinks the global housing market is in a bubble and we're only seeing the beginning of its collapse U.S home prices are currently about six times the average household income Which is higher than the previous record which was set in 2006 before the housing market collapsed and in other places around the world it's far worse Vancouver London Paris Shanghai Sydney and Taiwan all have home price to income ratios of 10 to 20.
in Australia for example according to core logic's May 2022 analysis home prices are currently 8.5 times household income and in Sydney the hottest housing market in Australia the ratio is 10.6 these ratios are so high in keep property markets around the world because over the past 40 years in most places there's been a consistent decrease in mortgage rates and that has ultimately meant that people have taken advantage of those lowering mortgage rates to increase the amount of debt that they have relative to their income the problem particularly when it comes to places with a lot of variable rate mortgages is that as rates reverse and begin to go up people are exposed to significant increases in their mortgage payments in Australia for example we are going to see the full effect of this throughout 2023 most outstanding mortgages in Australia are either on a variable interest rate or are on a two to three year fixed rate which ultimately rolls into a variable rate and in 2023 alone 800 000 fixed rate mortgages will be converting to the current variable rate a rate that is two to three times higher than the fixed rate that those people locked in during 2020 or 2021.
for context there are only 6 million mortgages in Australia in total so we're talking about about over 13 percent of the outstanding mortgages seeing a sudden increase in the monthly payments Wrentham believes a hit to the global housing market will have a knock-on effect to the stock market as higher housing costs will cause people to both draw on their Equity Investments as income and cut discretionary spending which will ultimately hit corporate profits and it's that hit to corporate profits which Grantham believes is the ultimate factor for what happens to the stock market in the next 12 to 18 months the housing bubble Ukraine war energy crisis presidential election the labor market and China's reopening are some of many factors which will ultimately determine the timing and extent of the next leg down but all of these really just funnel back into an impact of some sort on corporate profits which investors then react to in the stock market and we can see this sort of thing actually already playing out in the UK in an article from the daily upside the sponsor of today's video I learned that unlike in the US the UK construction industry is in quite a bit of trouble last year 4 000 UK construction companies folded into insolvencies and more broadly across all companies there were 22 000 insolvencies in 2022 which represents a 57 increase over 2021 and the highest rate since 2009.
the IMF is now projecting the UK to face a recession in 2023 but it could also just be the first of a wider issue that we see for many major economies around the world including the us the Daily upside is a completely free curated morning Financial brief followed by detailed stories of the important business events and news of the day it's informative and witty and goes far beyond the headlines to provide a fantastic digest of the Day stories there is a lot of noise in financial media and it's often difficult to sort through the enormous amount of click-baity headlines to find trustworthy sources of information the daily upside is the solution to this problem there' so whether you're a financial professional yourself L4 just want great way to start your day it's totally free to sign up and they send you one information filled email every morning reading the morning brief is an important part of my day especially as someone who uses these articles as a part of their research to create videos like this so I cannot recommend them enough join the hundreds of using the link in the description so what exactly are grantham's economic and stock market predictions for 2023 he believes that the US is very likely to fall into a recession and he cites two key indicators as his reasons why the first is the spread between the 10-year Government Bond and the three-month Government Bond this spread which essentially represents the difference between two far points on the yield curve has historically been a very good recession indicator the spread has gone negative eight times in the last 50 years and every time it has a recession has followed relatively quickly and on top of that there's never been a recession without the spread going negative First today the spread is not only negative but it's got one of the most negative spreads of the last 50 years wrentham's second indicator for why there may be a recession this year is that the covert stimulus in the form of excess savings is drying up very quickly according to his research Peak excess savings reached two to three trillion dollars in late 2021 and that the balance have been drawing down ever since with the entire excess savings expected to be gone sometime during 2023 and if this sounds familiar it's because it's the same prediction or estimation that has been made by both Ray dalio and Jamie dimon in their economic predictions so does that mean that the stock market has already reached a bottom well unlike most recessions Grantham thinks the stock market bottom will actually come a lot later and that's because if we isolate the super bubbles of the past Century which are 1929 1972 2000 and 2006 the stock market lows came after the recession started plus rate Cuts seem to have a far less positive effect during these super bubbles in fact the largest decline lines during the bubbles came after the first fed cut in 1929 for example the market fell 79 after the first cut in 2000 the market fell 41 and after the first cut in 2007 it fell 55 Grantham says he sees the S P 500 falling below 3 200 points by the end of 2023 with the odds of this happening at three to one that would mean a 17 decline for 2023 and if we assume four percent inflation a total real decline of about 20 bringing the total decline for the bear Market to about 40 although as Graham indicated earlier in the memo there are a wide varray of potential outcomes that could happen and this is just the most likely outcome according to Grantham on the positive side even though there are a number of underlying economic factors at play here they could resolve themselves over time there could be a soft landing and there may not be any further pain in the financial markets unfortunately on the downside history tells us that things could actually be a lot worse than what Grantham expects to happen in 1974 which is a nightmare situation according to Grantham the S P 500 dropped to below seven times its earnings or profits if that happened today even assuming corporate earnings don't decline which they very well could the s p would be down 70 percent of course this isn't likely or even probable but it does put in perspective where we are today relative to history even though stocks have come down in 2022 valuations are broadly still very high relative to historical averages so given his Outlook where is Jeremy Grantham investing in 2023 well he believes that U.S equities are pretty unfavorable right now regardless of whether you're looking at small or large caps but that outside the US is far more attractive in his memo he shared a chart with his firm's seven-year asset class forecasts and in them he has Emerging Markets performing the best followed by small and large International equities back in the US similar to what other fund managers have been discussing recently value stocks do look relative better than growth stocks but the truth is everything I've discussed today has really little to do with your actual investing if you have a long-term perspective I own a concentrated portfolio of a few really high quality companies that can do well and whether any kind of economic storm so I'm not really concerned at all about what the economic environment looks like over the next couple of years in fact if things do end up getting worse it's just really presenting me an opportunity to increase my ownership in great companies as pessimistic as some of these guys are in the short term the long term for the US has been and will continue to be extremely positive let me know who you want me to cover in the next video by leaving a comment down below and make sure to check out the daily upside for their free curated daily newsletter link and everything down in the description below
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