Stock market crash is a risk due to ‘superbubble’ says man who predicted dotcom bust!

This famous investor who predicted the dotcom bust says we’re in a superbubble. Does it mean a stock market crash is on the horizon?

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I was certainly taken aback when I saw the claim of a market ‘superbubble’ a few days ago. If we’re in one, then it could be only a matter of time before we experience a stock market crash. When I saw who made the claim — Jeremy Grantham, the co-founder and chief investment strategist of GMO — I was even more concerned. He’s been an expert in spotting and avoiding financial bubbles over his long investing career. In fact, Grantham identified the oncoming dotcom bust in 2000, and the housing bubble that led to the financial crisis of 2008.

So, when I noticed Grantham made the claim of a superbubble, I sat up and took notice. He published a research paper last week that detailed his thoughts. He started by explaining that “today in the US, we are in the fourth superbubble of the last hundred years”.

I actually shared similar views earlier in January about the prospect of a stock market crash in the US. I didn’t call it a superbubble, though. So now, I want to review what Grantham said about the US market, and also his conclusion on what investors should do. I might be able to take some wisdom from it for my own portfolio.

Are we in a superbubble?

Grantham says that this bubble is comparable to before the Great Depression in 1929 and the dotcom crash in 2000, and to the housing bubble in 2008. This is why he claims the US is now in “the fourth superbubble”.

So what is a superbubble? Grantham says it’s when prices rise far more quickly than they previously have done. Then, he says, the market narrows so only blue-chip stocks rise, and speculative stocks underperform.

This does seem accurate in the US right now. There was a huge rally in the S&P 500 from the March 2020 low to the end of December 2021 where the index rose over 100%.

I wrote about how growth stocks in the US were crashing back in December. In the article, I also recognised that the mega-cap stocks, such as Apple, Microsoft, and Alphabet, were all up. In other words, the blue-chips were higher, but the speculative growth stocks were underperforming. Therefore, according to Grantham’s definition, the US could be in a superbubble.

However, I don’t see the same signals in the UK. For a start, the UK’s large-cap index, the FTSE 100, is still lower than where it was before the crash of March 2020. And there hasn’t been the speculative crash in growth stocks in the UK market like there has been in the US.

Will the stock market crash?

Grantham seems to think the US markets will crash. Already this year, the Nasdaq 100 is down 11.5%, which could be a sign of blue-chip tech stocks beginning to crash. But he suggests that value stocks in other developed markets could be a good option for investors.

I think the US market could fall further from here, and even crash. The valuation of the Nasdaq index based on the forward price-to-earnings (P/E) is 28. It’s not the same in the UK market as the FTSE 100 is valued on a forward P/E of 12. 

If markets do fall, buying value stocks outside of the US could be a good option, like Grantham suggests. I’ll be looking to snap up cheap UK shares if they do!

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Dan Appleby has no position in any of the shares mentioned. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Alphabet (A shares), Apple, and Microsoft. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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