Seeking Alpha

Grantham: Market pricey, but not a bubble

  • They're still playing sports highlights at the greasy spoons in Boston, says Jeremy Grantham, not too worried about stocks being in a bubble. Harking back to a real bubble, Grantham remembers 2000, when the Celtics were displaced by CNBC's breathless coverage at these same joints.
  • Numbers make the same argument: The S&P 500 at 1,860 is only about 1-2 standard deviations outside the normal distribution of stock levels. To get to a two-sigma event - and a bubble - would require an S&P 30% higher than where it is now.
  • "There is an enormous creative tension for a sensible investor," says Grantham. The market is overvalued, but not absurdly so, and then there's the Fed backstop. "On a shorter time horizon, you can get whacked around the head, as we have been frequently."
  • So what's he buying? Emerging markets and value stocks in Europe are only selling at about fair value. In the U.S., high-quality stocks are not nearly as overpriced as the rest of the market (isn't the S&P 500 supposed to be "high-quality" stocks?). The Wells Fargo Advantage Absolute Return Fund (managed by GMO) has a 49% global equity allocation - high considering GMO's belief stocks are so overvalued - but Grantham expects the weighting to move down to 38% by October, which would be more inline with GMO's expectations of future equity returns.
  • Broad large-cap ETFs: PRF, VV, SCHX, NY, JKD, FEX, EQL, EEH, SPXH, TRSK, FWDD, PXLC, ERW, ALTL, SYE
Comments (10)
  • Paulo Santos
    , contributor
    Comments (20423) | Send Message
     
    The bubble is outside the S&P500, in tech stocks (but not legacy tech), biotech stocks.

     

    Things like N, CRM, FB, AMZN, WDAY, NOW, SPLK, LNKD, ZNGA, etc.
    15 Mar, 11:17 AM Reply Like
  • Rope a Dope
    , contributor
    Comments (575) | Send Message
     
    I know I started eliminating Biotechs from my daily screens shortly after ICPT went stratospheric a few months ago. That seemed to introduce so much volatility into the entire sector that I won't touch it right now. There may still be some bargains but it would take too much work to find them and my time is better spent elsewhere.
    15 Mar, 11:35 AM Reply Like
  • chopchop0
    , contributor
    Comments (3526) | Send Message
     
    That's why I play biotech with XBI. It actually included ICPT
    15 Mar, 03:20 PM Reply Like
  • Value Doc
    , contributor
    Comments (760) | Send Message
     
    It doesn't need to be a gigantic bubble to guarantee poor long-term returns--"significantly overvalued" will also generate poor returns. The equities market wasn't a bubble in 2007 either (though the economy and credit markets were).

     

    It's like saying "I don't mind being shot by a .38 caliber pistol, because at least it's not a 12-gauge shotgun".
    15 Mar, 05:29 PM Reply Like
  • Tack
    , contributor
    Comments (13554) | Send Message
     
    VD:

     

    I can't count the number of times I have seen claims that we're in for lower or "poor" returns for an "extended period." Many of these analyses project 5% annual returns, instead of 10%, or some such. I always read these with the unspoken implication being that people should not be in stocks. But, this raises the obvious question: if we're going to be in a lower-growth economy and slower markets, what alternate investment is supposed to make folks higher returns? Nobody ever includes the answer to this question in their gloomy outlooks because it's not obvious that any other asset class will likely perform better in such conditions.
    15 Mar, 05:39 PM Reply Like
  • Value Doc
    , contributor
    Comments (760) | Send Message
     
    Tack,

     

    All very true, and in my opinion, it's that factor, not QE per se, that has driven and will continue to drive the markets higher for quite some time yet. QE is very over-rated IMHO--nominal rates would be very low even without QE due to the deflationary macro backdrop.

     

    The only solution, if you want a chance at 10% or something like that, is some type of tactical approach (e.g. good stock or sector picking, some type of rotational strategy, seasonal market-timing, long-short, or something like that). Perhaps even something as simple as being careful with your entry points. For example, buying KO and T recently after sharp declines, rather than last year when they were popular. Or buying KMR with an 8.0% yield after its recent bout of weakness. Little things like that.

     

    Buying and holding the S&P 500 (or any broadly diversified stock portfolio) won't get you there from current levels. Sticking in cash hoping for a big crash is also an option, but is risky and speculative.

     

    Really, it's tough times for investors--I miss 2009 when there were bargains galore.
    15 Mar, 07:29 PM Reply Like
  • Paulo Santos
    , contributor
    Comments (20423) | Send Message
     
    The thing with QE is not about low rates. Low rates didn't stop the Japanese market from going down.

     

    The thing with QE is that when the FED buys risk assets like MBS or long-duration treasuries, the sellers of those risk assets turn around and substitute them. Since the QE amounts are so large, that substitution brings buying to nearly every risk asset (more so for direct substitutes like corporates or high yield, but also some for stocks, etc).
    15 Mar, 07:39 PM Reply Like
  • Tack
    , contributor
    Comments (13554) | Send Message
     
    VD:

     

    Exactly. To exceed the norms, you have to be an excellent assessor of value. there is no other avenue.

     

    My comment was only offered because I read lots of these projections about "poor returns" and can just see, in my mind, unsophisticated investors concluding this means one should run from the markets. But, unless one has a clever place to which to run, sticking with lower returns is better than having none.
    15 Mar, 09:25 PM Reply Like
  • Value Doc
    , contributor
    Comments (760) | Send Message
     
    That's an interesting point on the Japanese market, and I've thought about that before. However, I think there's a structural difference.

     

    If memory serves, throughout Japan's 20+year bear market, most Japanese corporates really never offered a strong dividend policy (at least, not in any appreciable amount), until relatively recently. Accordingly, in Japan, it was very difficult for investors to view equities as potential sources of reliable yields (or reliable, non-cyclical growth), and savers stuck with JGBs. The rare Japanese corporate that did offer a decent dividend policy and growing earnings, such as TM, has actually done quite well over that bear market period.

     

    In the US, I think the corporate governance is much more shareholder return oriented, and corporations have been aggressively boosting dividends in response to investor demand for yield. Really, a different ethos than the 1990s when it was all about growth and capital gains.

     

    Since mid-2011 (when the post-GFC economic growth bounce peaked), we've been following a mildly deflationary / dis-inflationary vector in the US, but the stock market has nonetheless rallied strongly. I think it's because people are desperate for yield (or growth), and US equities do offer some of that (though less than we would like at current prices). The Japanese market, during its 20+yr bear market, was never able to persistently advance under deflationary / dis-inflationary conditions. I would say a major reason, in addition to secular Yen strength / deflation, was the lack of yield and/or growth.

     

    I understand the portfolio substitution effect of QE, but I don't see PG crashing to a 6% yield (under current stagnant but not collapsing economic conditions) if QE ends. Too many yield-starved investors would bid it up before then. Perhaps QE/portfolio substitution amplifies this tendency, but I believe it would be very strong even without QE--too many desperate pension funds, insurance companies, retirees--"there's not enough yield or carry in the world" as Bill Gross observed.

     

    Most Japanese stocks just continuously declined for many years because they simply did not provide any reason for investors to buy them (dividend yield, profit growth, etc). In other words, they were uncompetitive even with 1-2% JGBs. Most Japanese corps have long been notorious for being run in the interests of every constituency except shareholders. Governance / management make a big difference, in both weak and strong macro environments.

     

    It's tough for stocks, Japanese or otherwise, to go up when they don't offer any reason to buy them (dividends, or legitimate, sustainable growth the benefits of which, it may credibly be believed, will ultimately be passed on to shareholders). Can you imagine major US corporations allowing their share prices to steadily decline for 25 years without management making any credible attempt to win back the faith of investors (dividend policy, buy-backs, strategic turn-around plans, etc.)? (OK, maybe the auto companies pre-GFC, but that's an exception). Look at what GE did after the GFC. They didn't just sit on their hands and not make any changes.
    15 Mar, 11:41 PM Reply Like
  • larocag
    , contributor
    Comments (1466) | Send Message
     
    "Numbers make the same argument: The S&P 500 at 1,860 is only about 1-2 standard deviations outside the normal distribution of stock levels. To get to a two-sigma event - and a bubble - would require an S&P 30% higher than where it is now."

     

    Numbers make all kinds of arguments when the difference between 2 standard deviations and a two-sigma event is 30%.
    16 Mar, 12:32 AM Reply Like
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