In a memo in January of this year, GMO founder Jeremy Grantham suggested to clients that they “brace themselves for a near-term melt-up in stock prices that might take the S&P 500 to the 3,600 area,” according to an article in Financial Advisor.
Citing a research paper published by Harvard University entitled, “Bubbles for Fama,” Grantham highlighted price acceleration as a strong indicator of bubble activity. For the three weeks following his memo, the article says, “Grantham’s suspicions looked prescient. Equities closed out a strong 2017 accelerating dramatically in January. Grantham described it as “base camp, perhaps, for a possible assault on the peak,” putting the odds at between 50 and 55 percent that the scenario would play out.
The melt-up didn’t occur, however. In October, the article reports, Grantham said in an interview: “As soon as it became clear the president was waging a war on global trade, the odds dropped to 35 percent.”
The article concludes: “Anyone who has listened to corporate earnings reports from America’s industrial companies realizes the effects of tariffs are starting to kick in. More significantly, the impact on the interconnected global supply chain could eventually reach deeper into the economy.”
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