Throughout his over 50 year career, billionaire investor Jeremey Grantham has developed a reputation as somewhat of a doomsday oracle. He has become famous for predicting some of the biggest stock market crashes of all time. Such as the dot com crash in 2000, the financial crisis in 2008, and most recently the tech bubble in 2021. Here in 2023, the US stock market is once again bumping up against all time highs. This has Grantham warning that the market is dangerously overvalued.
The US stock market has soared for the last nearly 15 years. Take a look at this chart here. This chart shows the performance of the S&P 500 index over the last couple decades. For background, the S&P 500 is generally regarded as a proxy for the US stock market. We can see here that the S&P 500 has skyrocketed from roughly 1,000 in February 2009 to its current level of approximately 4,500. The last 14 or so years have been one of the best time periods in the history of the stock market for investors. But the concern that Grantham and many others have is that the stock market has soared to unsustainably high levels.
One of the biggest drivers pushing the stock market to potential bubble territory was historically low interest rates. Interest rates in the United States spent the better part of the past 15 years at near 0%. These low rates acted like jet fuel for the stock market. Let me explain.
To truly appreciate Jeremy Grantham’s comments, you first have to understand the relationship between interest rates and asset values. Asset values are just a fancy way of saying things people own because it produces income for them. Think of stocks, bonds, and real estate as the most common types of assets the average investor owns in their portfolio. The value of any asset, including stocks, is based on the cash it will generate for you as the owner, discounted back to the present day using an interest rate.
