“The first and easiest leg of the bursting of the bubble we called for a year ago is complete,” legendary fund manager Jeremy Grantham writes in a new article, saying “most speculative growth stocks that led the market on the way up have been crushed, and a large chunk of the total losses across markets that we expected to see a year ago have already occurred.”

“While the most extreme froth has been wiped off the market, valuations are still nowhere near their long-term averages,” he cautions, saying things get more complicated from here.

“The long list of things that have gone wrong – that could interact and cause some component of the system to break under stress (perhaps an unexpected component) – makes for depressing reading. The complexities have multiplied, and the range of outcomes is much greater, perhaps even unprecedented in my experience. That having been said, the odds of a major U.S. market decline from here cannot be as high as they were last year. The pricking of the supreme overconfidence bubble is behind us, and stocks are now cheaper. But because of the sheer length of the list of important negatives, I believe continued economic and financial problems are likely.”

“My calculations of trendline value of the S&P 500 (SP500) (NYSEARCA:SPY), adjusted upwards for trendline growth and for expected inflation, is about 3200 by the end of 2023. I believe it is likely (3 to 1) to reach that trend and spend at least some time below it this year or next. To spell it out, 3200 would be a decline of just 16.7% for 2023 and with 4% inflation assumed for the year would total a 20% real decline for 2023 – or 40% real from the beginning of 2022. A modest overrun past 3200 would take this entire decline to, say, 45% to 50%, a little less bad than the usual decline of 50% or more from previous similarly extreme level.”

”Other factors suggesting a long or delayed decline include the fact that we start today with a still very strong labor market, inflation apparently beginning to subside, and China hopefully regrouping from a strict lockdown phase that has badly interfered with both their domestic and international business.”

At the beginning of 2022, Grantham, whose resume includes predictions of the market crashes in 2000 and 200, explained that we are in the fourth superbubble of the last hundred years. He estimated that total losses across the three major asset classes of stocks, bonds, and real estate could reach $35T in the U.S. alone, including $17T in stocks and $6T in bonds. “Well, so far, with real estate still making up its mind, losses in U.S. stocks have been over $10T and in bonds over $5T, in addition to an unexpectedly large loss of $2T in cryptocurrency. Certainly, a decent chunk of the losses we predicted have already occurred, a down payment if you will.”

He also gives credit to the COVID-19 stimulus that resulted in accumulation of excess cash as a contributor to economic resilience. “Most analysts put the peak of excess savings at $2-3T in late 2021, but this has been slowly drawn down over the course of 2022 and less than half now remains. “Once it runs out, by some estimates around mid-year, this particular support for the economy will be gone.”

Analyzing future growth prospects and investable asset classes, Grantham puts the spotlight on long-run issues of declining population, raw materials shortages and rising damage from climate change that are biting hard into growth.