GMO Chairman Jeremy Grantham told investors the U.S stock market is almost 25% above fair value now, and could become 30% to 35% overvalued before eventually dropping “painfully” next year.
In his quarterly letter to investors, Mr. Grantham, a noted contrarian, pegged fair value for the S&P 500 at 860, and predicted the market's drop, when it comes, will drag it more than 20% below that index's Oct. 19 closing high of 1,098.
GMO has already begun modestly trimming the equity portion of its asset allocation strategies, to 62% from 65%, “leaving plenty of room to pull back further if the market runs above 1,100, say, to 1,200 later this year,” Mr. Grantham wrote.
However, the market veteran wrote that there are still pockets of value to be had, primarily the stocks of high-quality blue-chip companies. Mr. Grantham said the “Teflon Men” — including Federal Reserve Board Chairman Ben Bernanke, Treasury Secretary Timothy Geithner (who was president of the New York Fed) and presidential adviser Lawrence Summers (who was treasury secretary under President Bill Clinton) — whom he argues helped lead the U.S. economy over the precipice last year all remain at the helm. He expressed surprise at just how extreme the rush of investors to re-embrace risk has been. — Douglas Appell