Jeremy Grantham: Stocks Still Pricey but Buying Opportunity Is Closer
The plunge in the stock market didn't catch Jeremy Grantham by surprise. A post here on April 26, the day that so far has marked the high in the yearlong rally, summarized Grantham's misgivings about the market, which he viewed as significantly overvalued and possibly a bubble in the making.
Some of the excess valuation has been corrected - the Standard & Poor's 500-stock index stands about 14 percent below the April 26 peak - and in a conversation with MoneyWatch, Grantham, the chief investment strategist of the fund manager GMO, said that a buying opportunity may emerge in global stocks in the next few months.
He warned, however, that the investment outlook is particularly murky now and that prices still have quite a way to fall before they reach fair value and a level at which he would feel comfortable plunking down his clients' money. Grantham calculates fair value at somewhere between 800 and 875 on the S&P 500, a further 17 percent to 24 percent drop from present levels.
"There's a veneer of confidence that's not as thick as it looks," Grantham said. "If you can crack confidence and knock the market down to 800, you would have cheap equities, especially outside the U.S."
While many investors might consider a decline to 800 on the S&P to be a sign of the wrath of God, Grantham said it would be merely "a common, garden-variety retest" of the bear market low in March 2009. And he thinks that low could have been even lower without the various economic stimulus programs.
"You shouldn't think the bailout didn't do considerable bailing out," Grantham remarked. Without it, the S&P "would have been deep into the 500s."
What circumstances could drive prices down from here, if only into the 800s? Pick 'em. Further bad news from Greece, China, Korea or under the Gulf of Mexico are all possible culprits, he said, and then there are the out-of-the-blue events that have a habit of coming along at inconvenient times.
If stocks were to be "whacked down to fair value," with the S&P hitting 800 by October, a development to which Grantham assigns a one-in-four probability, it would mean a decline of more than 30 percent in barely five months - probably not the good news that investors are hoping for. Given his views on the economy and markets and the other possible outcomes that he envisions, however, it could be the best-case scenario.
On Thursday, Grantham goes over some of those gloomier prospects and unleashes tart opinions about market bubbles, the morass in Europe and Ben Bernanke and his peers at central banks around the world. He also explains why a significant market bottom could occur around October and offers investors advice on where to put their money.
