There are many reasons to be bearish, says long-time bear and GMO founder Jeremy Grantham, but one complicating factor might keep stocks afloat for now – the fact politicians like being re-elected.
Grantham is talking about the US presidential cycle and the tendency of US presidents to stimulate the economy so the labour market is looking healthy in the six-month run-up to election time. Looking at data going back to 1932, he notes that for seven months of the presidential cycle, from October of the second year (this cycle 2022) through April of the third year (2023), stock returns are equal to those of the remaining 41 months of the cycle. Put another way returns are six times higher than normal.
A fluke? No, says Grantham, who says this has less than one-in-a-million probability of occurring by chance.
Perhaps this effect is now fading away, the way market anomalies often do when they become more widely known? Again the answer is no – cycle returns over the last 45 years have been about as powerful as the previous 45 years.
It’s also a global phenomenon. The effect is even higher in the UK than the US, while Europe had about half the effect, proving the US “clearly rules the global waves”.
“We are now in this sweet spot, which once again is up nicely so far”, says Grantham, adding it may support stocks “for a few more months”.
However, Grantham, who warned a year ago that stocks were in a “superbubble” that was about to burst, remains bearish – he still reckons the US market will end 2023 around 20 per cent below today’s levels.
