Hedge fund manager Jeremy Grantham expects investors can capture another 8%-plus return on stocks from present levels before the market reaches fully inflated bubble territory.
After that, a lengthy period of stock market losses can be expected to ensue.
The principal of Boston-based Grantham, Mayo, Van Otterloo & Co. combines both the good news and bad news in his first quarter letter to shareholders: the former being time still left to enjoy the thrill of a Fed-induced bubble; and the latter being years of stagnation and decline coming soon.
Grantham’s good news is delivered with sardonic revulsion at what he calls the Fed’s “Greenspan Era,” a period also encompassing the Fed chairmanships of Ben Bernanke and Janet Yellen.
During this period in Grantham’s view, monetary policy leaders have taken it upon themselves to push up asset values in order to create a wealth effect. Based on Shiller P/E, the GMO manager says market valuations have been 60% higher than in the previous 100 years.
This period has also seen the largest equity and housing bubbles (2000 and 2006, respectively) in U.S. history, prompting Grantham to opine:
“For me, recognizing the power of the Fed to move assets (although desperately limited power to boost the economy), it seems logical to assume that absent a major international economic accident, the current Fed is bound and determined to continue stimulating asset prices until we once again have a fully fledged bubble. And we are not there yet.”
The hedge fund manager stands by his previous forecasts that the S&P 500 needs to reach a level of around 2,250. When he first made that prediction two years ago, Grantham anticipated the fourth quarter of 2016 as the time of the market peak and subsequent doom.
Grantham’s currently quarterly letter omits a specific timeframe, saying more vaguely that “the current market still has a way to go before reaching bubble territory.”
The investment manager characterizes our present stage within the ongoing supercycle bull market as “middle-aged,” with room for further improvement in capital spending, home prices, housing starts and M&A activity, among other factors.
A “normal, modest” bear market is not incompatible with his forecast; Grantham implies a 10% to 20% drop in the market would satisfy politicians’ desire to keep the bubble blowing past the 2016 presidential election — in line with his initial forecast.
“So, ‘2,250, here we come,’ Grantham concludes (adding, without further comment, that “foreign markets are of course to be preferred”).