Market Seer Turns Bearish on U.S. Markets
Jeremy Grantham says emerging-markets stocks are attractive.
Jeremy Grantham says emerging-markets stocks are attractive.
Are we in the eye of the hurricane?
Jeremy Grantham thinks so. Grantham, who cofounded money management firm Grantham, Mayo, Van Otterloo & Co., believes the market is rallying in response to fiscal stimulus designed to make things look ducky when George Bush is up for re-election. (Grantham’s firm mostly runs money for institutional investors, but his firm does run two funds for retail investors: Evergreen Asset Allocation (EAAFX) and Vanguard U.S. Value .)
At the Morningstar Investment Conference in June 2002, Grantham said that the S&P 500's fair value was around 750, even though it was then trading near 1,000. In fact, the S&P 500 fell close to his target, but later rebounded to around 950.
In Grantham’s view, the market will head lower next year and slip to his new, lower target of 690--or lower. Grantham further lowered his estimate in response to new revelations that some companies had been overstating profits, and arrives at 690 by assuming an average P/E of 16 based on historical norms and an average profit margin of 5.5%. He’s no fan of the Nasdaq, either, which he says is only worth 1,000 (even though it’s currently trading near 1,500).
Additionally, Grantham points out that the market has gone down only twice in the third year of presidential terms, and those were at beginnings of World War II and the Korean War. His message to investors: "Enjoy the rally, but don’t get carried away."
I wouldn’t recommend that you go out and short the market come December, but I do think that good market strategists like Grantham help us understand what’s going on in the market, while shedding light on what areas carry the most risk.
Note that unlike some performance-chasers, Grantham tends to go against the current trends. Investors who've been loading up on bonds might find Grantham’s take to be particularly interesting. A year ago, Grantham thought bonds were compelling. Junk bonds, emerging-market debt, and TIPS looked dirt cheap to him, but now they’ve rallied so much, that he’s turned bearish. "The bond market has been overrun," he says. "The yield on TIPS peaked at 4.1% (after inflation) but now it’s just 1.7%. A normal yield would be 2.7%." The problem, as Grantham sees it, is that the bond market, particularly long-term bonds, are priced as though inflation will never come back. But if it does, those bonds will get hit hard.
While Grantham says that there aren’t a lot of attractive options left for investors, he did name four. First, he says emerging-markets stocks are inexpensive. (Premium Members might want to check out our Analyst Picks in the category for fund ideas.) Secondly, he favors foreign small-cap value stocks. (If you don’t have much in the way of this asset class, Tweedy, Browne Global Value (TBGVX) is a decent, though not pure, play on it.)
Additionally, Grantham still thinks that real estate investment trusts are a decent value. "At that time they were yielding 6.5%, now they’re down to 6.0% and that’s not bad," says Grantham. Premium Members can check out our Analyst Picks list of recommended real estate funds.
Lastly, Grantham is still recommending timber. Timber is defined as trees still in the ground as opposed to lumber, which is cut timber ready for the housing market. Though lumber prices have fallen, Grantham sees signs that the timber market is firming. There aren't many ways to play timber, but shares of Plum Creek Timber are one decent option. Premium Members click for Sanjay Ayer's Analyst Report on the company.
You can read more about Grantham's opinions at www.gmo.com.
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