A fairly priced market? Grantham sees one.
Here are several interesting points from GMO cofounder Jeremy Grantham's breakout session Thursday morning.
* A key question for investors: "How cheap would the market have to get in order to be fully invested?" The answer to that question should be written down.
* In March the market was the cheapest it had been in 20 years, but GMO was still underweight stocks. If the market (S&P 500) was under 666 for one more trading day, GMO would have been overweight equities for the first time in 20 years. Instead, GMO was underweight by 3-4 percentage points.
* The market is about fairly priced today. Grantham recommends investors take a year to 15 months and get to normal equity investment weight and slowly average into the market.
* Assume the market screams up to around 1,00-1,100. Normally GMO would do nothing because it waits for extreme outliers--normally GMO doesn't do much when the S&P 500 is 10-20% overpriced. This time Grantham is thinking about breaking the rules. If the S&P 500 goes over 1,000, he would probably raise some more cash.
* Grantham outlined return expectations for high-quality U.S. stocks: U.S. high-quality equilibrium real return expectation: 5.8% per annum; large-cap domestic is 5.7%; small cap domestic is 6.2%.
* Paul Volcker was the only Fed chairman who would not play the game and who had "backbone and ethics." Alan Greenspan was another story; he would stimulate the economy again and again with lowered interest rates.
* Grantham said that he thinks 550-650 will be the low for the S&P for this economic cycle because of the large, rapid, coordinated economic stimulus enacted worldwide. * He can't make a true GMO asset allocation retail fund (the only retail fund currently is Evergreen Asset Allocation) because retail investors can't stomach the volatility.
This article was excerpted from a story on Morningstar.com.