The stock market has already been volatile this year and investors are wondering what's next.
The S&P 500 had a rough start in April, shedding about 3% halfway through the month, only to end up 0.6% for the month. The S&P 500 finished April close to a record high, while the Dow closed at a record high.
Many investors are wondering if we're in a bubble or if there's a correction coming.
In his latest quarterly letter, Jeremy Grantham, veteran fund manager at GMO, put out his "best guesses for the next two years."
Grantham draws on John Hussman's research that shows "an overpricing for the U.S. markets that ranges from 75% overpriced to 125% at the end of March." Meanwhile Grantham writes that GMO "very much agrees with the spirit of this data, but our preferred measure for our 7-Year Forecast has the market slightly less overvalued at 65%."
He also acknowledges that the bull market could already have come to an end even as he wrote his quarterly letter, but he believes "it probably (i.e., over 50%) will not end for at least a year or two and probably not before it reaches a level in excess of 2,250 on the S&P 500."
Grantham believes the market bubble will burst around or after the 2016 presidential election."That this year should continue to be difficult with the February 1 to October 1 period being just as likely to be down as up, perhaps a little more so." "But after October 1, the market is likely to be strong, especially through April and by then or in the following 18 months up to the next election (or, horrible possibility, even longer) will have rallied past 2,250, perhaps by a decent margin." "And then around the election or soon after, the market bubble will burst, as bubbles always do, and will revert to its trend value, around half of its peak or worse, depending on what new ammunition the Fed can dig up."
Grantham doesn't think this time is different. But "given this regime of the Federal Reserve and given the levels of excess at other market peaks, I think it would be different to end this bull market just yet."
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