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Jeremy Grantham has warned that the SNP 500 is going to lose up to 60% of its value as he predicts a deep recession in the US in 2024 Grantham is a billionaire investor who made a name for himself with predicting the dotom bubble of 2000 and the housing bubble of 2007 making a fortune from both economic crises and he recently stated one should expect something pretty bad this time we wait to see if this follows the pattern of history or whether it is in indeed that lovely creature a new paradigm but history is not kind to the new paradigm thinking Grantham is known for making dramatic predictions and he is calling today's stock market the biggest bubble he's ever seen in fact the famous bubble historian expects the S and p500 index value to fall to at least 3,000 and has even stated that he would not be surprised if it falls closer to 2,000 if the wheels really come off for context on the day of making this this video the SNP 500 Index is valued at 5,146 so grantham's prediction of a decline of up to 60% would be the worst stock market crash since the Great Depression in 1929 when the Dow Jones Industrial dropped 89% from its peak in this video we will explore why Jeremy Grantham is convinced the SNP 500 stock market is about to burst and what you can do to protect and grow your money during such economically challenging times so how can we determine if a market is overvalued or undervalued one of the most common ways to analyze whether the stock market is overvalued or undervalued is the shillo PE Ratio the shillo PE Ratio is generally applied to an entire stock market index most often the S&P 500 and is believed to provide an accurate measure of the value of an entire stock index as it is calculated over a 10-year period so Smooths out the short-term earnings volatility ility experienced by many companies it also takes into account inflation which can make a company's profits look artificially high in the shortterm to understand the Schiller PE ratio we must first understand the PE Ratio the price earnings ratio or PE ratio is used to assess whether a single company is undervalued or overvalued by comparing its stock price to its earnings per share EPS for example if a stock is trading at $10 per share and its earnings per share are $1 then the stock has a PE of $10 divided by $1 which equals 10 this is a very helpful metric to compare the performance of companies and to identify whether or not an individual company is over or undervalued however the problem with the standard PE ratio is it will reflect short-term changes in a company's earnings performance that could have been caused by big macroeconomic events such as a market correction or recession and not because of the company having strong fundamentals it is is therefore not such a reliable measure of a company's long-term value or of the strength or weakness of the market as a whole and that is why Robert Schiller a Yale University Professor proposed looking at inflation adjusted 10-year earnings data to minimize the impact on earnings of short-term economic events the formula for The Shilo PE ratio is current price divided by average inflation adjusted 10year earnings per share in other words to calculate the Shilla PE ratio we need to look at the yearly earnings of the S&P 500 for each of the past 10 years adjust these earnings for inflation using the Consumer Price Index or CPI average these values by adding them up and dividing by 10 to get the inflation adjusted EPs and then divide the current price of the S&P 500 by the inflation adjusted EPS to get your Shilla PE ratio a lower Shilla PE value suggests the potential for higher returns from equities over the long run whereas a high schilla PE value could suggest that a market correction might soon be on the horizon so how does this apply to the stock market right now well at the time of making this video the S&P 500 shil PE is 34.4 for context over more than 100 years the average and median shiler PE ratio has been around 15 or 16 rising up significantly higher often before Market crashes this chart shows that the all-time high in the shilli PE Ratio was in December 1999 when when the figure reached 44.99 just before the dot crash similarly it reached a previous high of 3148 in 1929 just before Black Tuesday and the beginnings of the Great Depression it is for this reason that Grantham argues that corporate profits in the US are currently at unsustainable levels creating a bubble that will soon burst in his view the so-called Magnificent Seven stocks which include Apple Tesla and Avidia have accounted for virtually all of the S&P 500's gains in the past year and if you took these seven companies out of the equation the SNP 500 would not be up for the year it is this over Reliance on the Magnificent Seven stocks that leads Grantham to believe that the SNP 500 is currently overvalued in addition to an overvalued stock market Grantham also believes a series of economic factors will cause the American economy to contract fairly soon for example the US government is currently maintaining $33 trillion of debt following recent efforts to stimulate the economy and faces the prospect of paying huge amounts of interest to service the debt in addition a period of increased interest rates is creating immense challenges in the real estate and mortgage markets as Consumer Debt becomes more and more expensive this All Leads Grantham to believe that the upcoming market crash will be bigger than 2,000 because it includes real real estate and bonds and that one did not while this Outlook may seem alarming let's now look at some of the key strategies Jeremy Grantham suggests you apply to protect and grow your money during such economically challenging times strategy one invest in non- US equities Grantham has stated to the extent you can avoid the US it's the most overpriced Market in his view the stock market bubble is mostly concentrated in the us as a result investment opportunities do exist outside the US most notably in Japan and the Emerging Markets as both are considered cheap compared to the US Stock Market there are a few different ways to access foreign stocks including buying them directly in a global account offered by Brokers such as Fidelity or interactive brokers however direct foreign investing comes with added costs tax implications and currency conversion issues meaning it isn't always the best best method to invest abroad for the average investor instead you could consider investing in exchange traded funds ETFs that will give you exposure to International markets without some of the complications of direct foreign investing ETFs invest in a portfolio of stocks or bonds designed to mimic the composition and performance of a financial market index unlike index funds you can buy and sell ETF shares just like individual stocks during the trading day which makes ETFs very flexible ETFs will typically let you target the exact geographies you want and will cover a wide variety of investment categories and markets allowing you to manage some of the additional risk that comes with investing abroad good examples of ETFs that invest in a wide range of markets excluding the US are vxus the Vanguard Total International stock ETF Vu the Vanguard ftsc allor xus ETF and acwx the ishares msci Hui xus ETF all three ETFs invest in a wide range of countries including Japan the UK China Canada France Switzerland India Germany Australia and Taiwan for emerging markets some of the top performing ETFs in The Last 5 Years include iemg the I shares core msci Emerging Markets ETF and a the amundi msci Emerging Markets ETF both ETFs invest in emerging markets such as China India Taiwan South Korea Brazil Saudi Arabia South Africa and Mexico strategy two buy American depository receipts another option to invest abroad is to buy American depository receipts or adrs adrs are suets issued by a depository bank that represent shares in a foreign corporation adrs are listed on a domestic US exchange such as the New York Stock Exchange just as any Dom domestic us shares would investing in ADI as easy as they're available through US Brokers such as Fidelity or Charles Schwab they offer us investors a way to purchase stock in overseas companies that would not otherwise be available allowing you to invest in some of the most familiar companies in global business such as shell astroica or Unilever to begin offering adrs a US Bank must first purchase shares in foreign companies on a foreign exchange the bank holds the Stocker inventory and issues an ADR for domestic trading adrs are priced and traded in dollars and any dividends earned are received in dollars so the investor does not have to face any of the currency issues associated with buying foreign stocks directly however investing in an ADR May incur larger fees that are not charged for domestic stocks as the bank will charge an additional fee for creating and issuing the ADR three focus on quality in the US market if investing outside of the US does not appeal to you then Grantham says it's critically important to take a good look at quality in his words the stock market is filled with individuals who know the price of everything but the value of nothing in other words there's a good chance that a company's True Value may not be reflected in its price as we discussed earlier Grantham believes the S&P 500 is currently grossly overpriced and due for a significant Market correction you might therefore be wondering why we would still suggest investing in the US Stock Market in 2024 well the good news is that even with the challenges that currently exist there are still us companies that offer Great Value in grantham's view AAA stocks such as Walt Disney Target Corp or Coca-Cola offer an investor Great Value over the long term for example let's take a look at Coca-Cola in grantham's view you don't want to own Coca-Cola it's just too boring but in the long run Coca-Cola does very well in other words while other companies may have more innovative business models or operate in more popular upand cominging sectors that excite and turn the heads of many investors investing in a boring company with an established track record and strong fundamentals Remains the smart play to protect and grow your money particularly during a market correction Grandam sees Coca-Cola as a strong long-term investment as it offers less risk less debt and less volatility than many other us companies and yet it still consistently outperforms them so there you have it the strategies you can follow to protect and grow your money even if Jeremy grantham's prediction of a significant US market crash materializes whatever strategy you decide to take you should always consult a financial adviser to make sure you find the approach that is best tailored to your financial goals and attitude to risk while Grantham has many convincing reasons why the next big US market crash is just around the corner the Super Bubble in stocks housing and commodities he declared at the start of 2023 is yet to burst and while he did successfully predict the dot bubble of 2000 and the housing bubble of 2007 he has openly stated in the past that he is often early in identifying investment themes and tends to be painfully wrong in the short term only time will tell if his latest prediction comes true or not that is why when making investment decisions it's crucial to remember one of the most important rules about investing it's not timing in the market but time in the market that will make you wealthy ultimately you are an investor not someone who can predict the future if you found value in this video please hit the like button don't forget to subscribe and click the Bell icon so you won't miss out on more content until next time keep building your wealthy life
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