A legendary British investor says the stock market is in a bubble. Here’s what I’d do now

The latest money manager to warn of another stock market crash is Jeremy Grantham, who called both the dotcom crash and the financial crisis.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Economic Uncertainty Ahead Sign With Stormy Background

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The stock market has had a good run since the February/March Covid-19 crash. The FTSE 100 index, for example, is up nearly 30%. Meanwhile, the S&P 500 is up around 40%. We may not be out of the woods yet though. Worryingly, the majority of professional money managers expect another stock market crash in the near future.

The latest to come out and warn about another crash is legendary British investor Jeremy Grantham, co-founder and chief investment strategist of Boston-based money manager GMO. Grantham – who has a great track record when it comes to predicting stock market crashes – believes that stocks are now in a bubble.

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Undeniable economic problems

In an interview with CNBC last week, Grantham said the stock market rally we’ve seen since late March was a “rally without precedence.” He explained that this was the only rally in the history books to take place against a background of “undeniable economic problems.

Grantham described the market as the most “crazy” he’s seen in his career. In his view, the market is now in bubble territory.

My confidence is rising quite rapidly that this is, in fact, becoming the fourth, real McCoy, bubble of my investment career. The great bubbles can go on a long time and inflict a lot of pain but at least I think we know now that we’re in one. And the ‘chutzpah’ involved in having a bubble at a time of massive economic and financial uncertainty is substantial,” Grantham said.

Graham also said the market was being driven by “uncontrolled day traders” who are currently out of work and into market speculation. He also noted that investors should have zero exposure to US equities right now.

Stock market crash: how I’m protecting my portfolio

So, what does this mean for investors? Should we be worried about this call from Grantham?

Well, I’m not going to rush out and sell my whole portfolio of stocks simply because Grantham is bearish on the stock market. Realistically, no one knows what the market is going to do in the short term.

That said, when a top investor like Grantham, who warned that stocks were overvalued both in 2000 and 2007, right before big crashes, is saying that stocks are in a bubble, I think it’s worth taking note and thinking about risk management.

I can say I’ve certainly been focusing more on risk management in the last few months as the market has surged. I’ve offloaded a few weaker holdings that could be hit hard if we were to see another crash. Instead, I’ve focused more on high-quality resilient stocks that have strong growth prospects in a post-Covid-19 world.

I’ve also been stockpiling cash recently. Cash is a terrible investment over the long term, but it’s very handy in a stock market crash. That’s because it enables you to pick up stocks at amazing prices when other investors are panicking.

If share prices do crash again, I’ll be ready to capitalise.

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Views expressed 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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