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.