Did You Miss the S&P 500's Bottom?

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Some managers think the market is pricey again.

The good news for many investors is that the S&P 500 Index has rallied in the past few weeks from its recent low in March. The bad news is that the market may now be overvalued.

We reported back in February the views of two prominent fund managers--Jeremy Grantham of GMO (his firm advises Evergreen Asset Allocation EAAFX) and John Hussman (who runs both the Hussman Strategic Growth HSGFX and Hussman Strategic Total Return HSTRX funds)--who both have good track records estimating market valuations. At the time they were saying that while stocks were cheap (for the first time in years), they had been cheaper before, notably 1974 and 1982. Now that the S&P 500 Index has risen well above its March low of 666 to around 880, both managers see only average returns, at best, going forward.

Jeremy Grantham has reined in his fair value for the S&P 500 Index in the past few months. In a March letter, he estimated the fair value of the S&P 500 to be around 900. But in his most recent May letter, he puts the benchmark's fair value at 880. The roughly 2% drop in estimated fair value may not seem like a big deal, but it does mean that U.S. equities may not be a screaming bargain any longer.

Hussman recently posted a similar message in his weekly commentary. As of May 4, Hussman wrote, "Market climate for stocks was characterized by modest overvaluation on virtually every measure that does not assume a return to record 2007 profit margins. Most likely, stocks are priced to deliver total returns in the area of about 8% over the coming decade, which is not hostile valuation, but is certainly not strongly compelling, particularly in an extremely overbought and uncorrected market."

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