A stock market crash involves share prices falling sharply and staying down for some time. According to Jeremy Grantham, there’s one on the way.
Critics say Grantham has predicted about eight of the last two crashes, but I’m pretty sure he’s right that there’s one coming. So what am I doing to prepare?
Grantham’s thesis
Grantham is expecting a fall in the S&P 500 of between 25% and 50%. Obviously, not every stock is going to fall by the same amount (more on that later) but this is the overall picture.
According to Grantham, valuations for US shares hit unreasonably high levels during the pandemic. And it’s not just the S&P 500 – it’s also bonds, housing, and fine art.
So what does Grantham recommend? Either getting out of US stocks entirely, or taking a long-term view and sticking to materials and shares in clean energy companies.
I own shares in some S&P 500 companies, including Apple and Amazon. So should I look to get my money into UK stocks, sell out entirely, or do something different?
Is Grantham right?
It’s a fair criticism of Grantham that he’s been insisting investors should sell since 2021. But an investor who sold back then would have missed a 10% return from US stocks.
Worse yet, the green transformation has underperformed spectacularly. Peter Garnry, Head of Equity Strategy at Saxo, identifies it as ‘the worst-performing theme of the past year.’
Grantham expected rising interest rates to hammer US equities. Instead, more expensive borrowing costs have slowed down the energy transition and made it more expensive.
Grantham might reply that renewable energy is a long-term theme. But if so, then it should be compared to the long-term prospects for stocks, not the next 12 months.
Preparing for a crash
I’m sure Grantham’s right in thinking a stock market crash is on the way. That’s always been true before and I doubt things are any different now.
Knowing there’s a crash coming isn’t the difficult bit. The challenge is figuring out when and what to do about it.
Working out when share prices are going to collapse is difficult. So the best approach for me is one that involves being constantly prepared, so I’m ready whenever it happens.
There are two parts to this. The first is to invest for the long term and the second involves focusing on the underlying business.
Long-term investing
When I invest, I look to build wealth for the long term. That means I need to think about how things will look in 20 years, not 20 weeks.
Equally, my approach to investing doesn’t involve buying stocks to sell for a profit. So where share prices will be isn’t important.
Instead, I make investments to hold and earn a return from the underlying business. That means what matters to me is how much cash the company makes, not its share price.
Since I’m not planning on selling any of my investments, the price I could get for them doesn’t matter. So even if Grantham is right, I’ll be ok with a stock market crash in the next year.
