Superbubble? Legendary Market Pundit Says Stocks Could Fall By Nearly 50%

GMO co-founder Jeremy Grantham said the recent pullback in the SPDR S&P 500 ETF Trust (NYSE: SPY) is just the beginning of the bursting of a stock market "superbubble."

What Happened? In a new interview with Bloomberg, Grantham said speculation in meme stocks, joke cryptocurrencies and other high-risk assets in recent years is finally on the decline. He said market valuations are so inflated at current levels that the Federal Reserve will have a difficult time preventing the S&P 500 from dropping to 2,500, roughly a 48% drop from its all-time highs earlier this month.

Why It's Important: Grantham correctly predicted the last three market bubbles and said the current superbubble is in the "buy the dip" mode. He also said the relative strength of blue-chip stocks in recent months compared to slumping speculative asset prices is a textbook precursor to a major market crash.

"You don't have two years of buying frenzy dying overnight," Grantham said. "This has been exactly how the great bubbles have broken."

Related Link: Gold Is Outperforming Bitcoin And The Stock Market In The Past 3 Months: What's The Better Hedge?

Grantham specifically mentioned GameStop Corp. (NYSE: GME), AMC Entertainment Holdings Inc (NYSE: AMC), Hertz Global Holdings Inc (NASDAQ: HTZ), Dogecoin (CRYPTO: DOGE) and NFTs as examples of the type of frenzied market speculation that created the fourth U.S. superbubble.

For investors looking to avoid the crash in U.S. equities, Grantham said investors should focus on value stock in emerging market economies, especially Japan.

“I also like some cash for flexibility, some resources for inflation protection, as well as a little gold and silver," he said.

Benzinga's Take: Investors looking to build a Grantham superbubble hedging portfolio should consider staying away from meme stocks and cryptocurrencies and buying the iShares MSCI Japan ETF (NYSE: EWJ), the SPDR Gold Trust (NYSE: GLD) and the iShares Silver Trust (NYSE: SLV).