Sunday, May 4, 2014

Prediction : S&P 500 bubble 20% away

The next bubble in U.S. stocks appears to be about 20 percent away, according to Jeremy Grantham, chief investment strategist at Grantham, Mayo, Van Otterloo & Co.

The chart depicts Grantham’s outlook for the Standard & Poor’s 500 Index, which he presented yesterday in a quarterly letter to investors. The chart also captures the S&P 500’s surge since the current bull market began in March 2009.

Stocks would enter a bubble with the index at 2,250, Grantham wrote, citing statistical analysis of earlier periods in which the prices of shares and other assets surged and then tumbled. Yesterday, the index closed at 1,883.68. The S&P 500 may start advancing there in October and exceed that level by the presidential election in November 2016, he wrote.

“I am sure it will end badly,” the Boston-based strategist wrote. The S&P 500 may lose half its value or even more, he added, unless the Federal Reserve finds ways to head off the plunge.

Grantham defined a bubble as “a 2-sigma event,” in which the value of the S&P 500 or another benchmark rises more than two standard deviations above its historical trend.

Bubbles occur more often than mathematics would suggest, the report said. GMO’s analysis found that they tend to happen every 31 years, sooner than the 44-year time span indicated by probability theory.

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