“ ‘I am doubling down, because as prices move further away from trend, at accelerating speed and with growing speculative fervor, of course my confidence as a market historian increases that this is indeed the late stage of a bubble. A bubble that is beginning to look like a real humdinger.’ ”
That is Jeremy Grantham, co-founder and chief investment strategist at Boston-based money manager Grantham, Mayo, Van Otterloo & Co., in a research report dated Tuesday after a particularly withering year for his investment outfit in 2020.
Grantham’s bearish view on valuations was reflected in GMO’s investment strategy which trailed the S&P 500 index SPX,
Last year was a remarkable year for risk assets in the face of a global viral epidemic that left equity indexes initially reeling in the spring, only to stage a spectacular rebound in the ensuing months as fiscal and monetary policy contributed to an economic recovery.
The S&P 500 SPX,
The Dow Jones Industrial Average finished 2020 up 7.25% in 2020, while the S&P500 index gained 16.26% and the Nasdaq Composite returned 43.64%.
Grantham however says that the market’s bubblicious state has accelerated since he last declared values inflated and referenced a quote often attributed to famed economist John Maynard Keynes stipulating that “the market can remain irrational longer than you can remain solvent.”
In Grantham’s words “either way, the market is now checking off all the touchy-feely characteristics of a major bubble.”
He also mentions the surge in interest in electric-vehicle makers like Tesla Inc. TSLA,
“The most impressive features are the intensity and enthusiasm of bulls, the breadth of coverage of stocks and the market, and, above all, the rising hostility toward bears,” he writes.
What’s a prudent investor to do with one of the legends of Wall Street signaling caution is warranted?
Grantham says assets considered value, or trading at a discount based on some metric and emerging markets may be better bets in the near term. He said such bets go “along with the greatest avoidance of U.S. Growth stocks that your career and business risk will allow.”
