by Gary Alexander
August 13, 2024
It’s as predictable as hurricanes in August and September. Markets get volatile; the perma-bears predict that this is the beginning of the “worst crash ever;” the media broadcast their worst nightmares widely, since bad news sells. Then, as predictably as autumn leaves fall, the market recovers in the fourth quarter.
Perma-bear Jeremy Grantham on his “We Study Billionaires” podcast last Thursday said, “This is the most vulnerable market there has ever been.” He cited the Japanese asset bubble in the late 1980s, the dot-com bubble at the turn of the century and the mid-2000s housing bubble, all including 50%+ market crashes.
“Most vulnerable market EVER” encompasses 1929, 1973, 2000 and 2008. Those markets collapsed by 89% (Dow), -48% (S&P 500), -78% (NASDAQ) and -55% (S&P 500), respectively, but those markets also had rapid, manic “bubble” bidding, stagflation, lack of earnings support, and high leverage, respectively.
Grantham is 85 and has been doing this a long time, since founding GMO LLC 1977, when the Dow was under 1,000, and the S&P 500 and the new NASDAQ were both under 100. Grantham built his reputation around being right about some earlier bubbles, but he has been wrong for most of the last 15 years.
Forbes Magazine attended one of Grantham’s bearish rallies in Chicago almost a decade ago, writing:
“For long-term observers of Jeremy Grantham, the chief of GMO LLC and erudite analyst of world investing trends, there’s never a moment when you see Grantham gush about investment trends. There’s a reason why he’s nicknamed the ‘perma-bear.’
“Last night at Chicago’s Morningstar conference, as in past talks in recent years, Grantham was ever the cautionary Cassandra, weaving in dire scenarios …. In Grantham’s long-term forecasts, though, which stretch out seven years, big U.S. stocks will barely eke out a gain while the biggest winners are in emerging-markets and timber….”
—-Forbes, June 25, 2015, Grantham’s Bubble Gun Hasn’t Been Triggered Yet, by John Wasik
Grantham repeated this advice in 2018, according to Bloomberg: “Grantham has a battle plan for an overvalued U.S. stock market: Allocate heavily to emerging-markets equities.”
That has not been the best way to invest since 2018. The iShares MSCI Emerging Markets fund has been flat since early 2018, while the S&P 500 is up five-fold, and the earnings gap has magnified that gain.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Last November, Grantham said that the S&P 500 could dip below 3,000 (it’s currently over 5,300), or crash by over 50% “if a couple of wheels fall off.” This is an old song for him. On October 14, 2022, after the S&P had fallen 17% in two months, Grantham predicted it would fall a total of 40%, but October 14 was when the market started rising (Business Insider, “A 26-year market vet breaks down why investing legend Jeremy Grantham is correct to compare the current market to the 2000 and 2008 ‘super bubbles’ – and warns stocks will fall another 20%,” October 15, 2022).
Last week, we also heard from billionaire fund manager Mark Mobius, 87, who reportedly told The Economic Times that the recent sell-off in stocks could be a warning sign that there is more trouble ahead.
How Come Nobody Warns of a “Market Melt-Up” Before It Happens?
History is replete with bears who constantly warn of a “coming crash.” I’ve followed a fellow who has predicted a “Greater Depression” for the last 45 years, missing a 50-fold Dow gain. In the 1920s, Roger Babson was famous for predicting a crash every year, until it finally happened in 1929, but he missed a 5-fold bull market first. Now we have this curmudgeon Grantham, missing big gains since 2015.
Why don’t we hear about the success of the “perma-bulls,” who predicted big gains in the early 1980s, when everyone else seemed to be citing “cycles” and “bubbles” as reasons to get out of the market?
In 1982, as I recall, several pundits were citing the Kondratieff 50-year cycle as a reason for getting out of stocks, when that exact cycle said it was the perfect time to get back into stocks. What they didn’t realize is that the exiled Soviet economist Nikolai Kondratieff was right – the parallels of 1929-32 were nearly perfect in the 1980s, but this time we made the right choices to avoid a deeper depression in the 1980s.
Consider these 50-year parallels:
- The American economy contracted drastically from 1929 to 1932… and 1979 to 1982.
- The stock market more than tripled from 1932 to 1937 … and from 1982 to 1987.
- There was another huge market crash in 1937 … and in October 1987.
- The market rally resumed only after war broke out in 1941 … and in 1991 (the Gulf War).
The market turned around precisely on this calendar date, August 13, 1982, with a lucky Dow low of 777.
The gains since then are phenomenal – by some measures over 150-to-1:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Did anyone scream “buy” in 1982? Yes – at least two pundits, both of whom I later worked with:
(1) In 1981 and 1982, Mark Skousen, editor of Forecasts & Strategies, went against the grain of the gold-enamored newsletter community, predicting “Reaganomics Will Work,” i.e., that the supply-side implications of the Kemp-Roth tax bill would fuel a dramatic U.S. stock market rally.
(2) John Dessauer, editor and publisher of “Dessauer’s Journal” (later “Investor’s World”) also predicted a “buying panic” in late 1982. At the start of the year (January 6, 1982), he predicted “A new record high on the DOW…before the sun sets on 1982.” On August 4, 1982, just a week before the turnaround, he wrote (in bold, all-caps, like this), “THE RISK AT THIS POINT IS A DRAMATIC UPTURN…. a sudden burst of optimism that carries stock prices higher without warning…. Throw away the rule book. When the run comes, stock prices will move up fast.” (The market rose 30% in the next two months, to set new all-time highs by the end of 1982).
Why did most other observers miss the market bottom? They were slaves to past trends and waves. They compared 1982 to 1929 (instead of 1982 to 1932), without learning the lesson: That which we most fear is least likely to happen. That which most scarred us has taught us the deepest lessons. We will never let the 1930s happen again because it hurt so bad. Economists at the Fed will never let the 1930s happen again.
August 1982 started out with eight straight down days, as Fed Chairman Paul Volcker’s tight monetary policy threatened to bring on deflation in the midst of our worst postwar recession, but Volcker didn’t seem to care. In early August, Volcker went on a fishing trip in Mexico, even as economic panic loomed.
America was in the depths of the second of two severe back-to-back recessions, the worst slowdown since the 1930s. From mid-1979 to the end of 1982, there were 14 quarters of net negative growth. The Prime Rate hit 21.5%; unemployment hit 11.2%; inflation reached 13% in 1980, but then slipped below 4% by mid-1982, threatening deflation, so finally the Fed Chair blinked and flew home from his fishing trip.
The market was also fishing – for a low. In the first four days of the week, the market fished for a bottom:
Then, Volcker began easing the Discount Rate. The first cut was a full point, from 11% to 10%. That caused the market to stop falling. Then he lowered the Discount Rate five more times in the second half of 1982, down to 8.5%. Short-term (90-Day) T-bills declined from 13.3% to 7.8% in the third quarter and banks lowered their Prime Rate from 21% to 13% as the Fed was determined to flood the market with new liquidity after the failure of Penn Square Bank and a raft of August deflationary indicators came out:
After 200 years of rapid growth, America seemed to be in decline. From 1973 to 1982, U.S. GDP had declined in 11 of 40 quarters, but inflation doubled prices in that decade. At this panic bottom, Fed Chair Volcker had throttled inflation, and the Dow gained 250% in five years, and 50-fold in the last 42 years. (And over 100-fold gains in the S&P 500, assuming reinvested cap-gains and dividends, per above chart).
All content above represents the opinion of Gary Alexander of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
Look to Japan for the Cause of the Latest Volatility
Income Mail by Bryan Perry
A Rotation into Corporate Debt is Underway
Growth Mail by Gary Alexander
The Perma-Bears are Roaring Again
Global Mail by Ivan Martchev
A Dramatic Increase in Yen Correlations
Sector Spotlight by Jason Bodner
August is Market Extinction Month
View Full Archive
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About The Author
Gary Alexander
SENIOR EDITOR
Gary Alexander has been Senior Writer at Navellier since 2009. He edits Navellier’s weekly Marketmail and writes a weekly Growth Mail column, in which he uses market history to support the case for growth stocks. For the previous 20 years before joining Navellier, he was Senior Executive Editor at InvestorPlace Media (formerly Phillips Publishing), where he worked with several leading investment analysts, including Louis Navellier (since 1997), helping launch Louis Navellier’s Blue Chip Growth and Global Growth newsletters.
Prior to that, Gary edited Wealth Magazine and Gold Newsletter and wrote various investment research reports for Jefferson Financial in New Orleans in the 1980s. He began his financial newsletter career with KCI Communications in 1980, where he served as consulting editor for Personal Finance newsletter while serving as general manager of KCI’s Alexandria House book division. Before that, he covered the economics beat for news magazines. All content of “Growth Mail” represents the opinion of Gary Alexander
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