One of the most contentious and vital questions of the current market environment is whether the current price action is the beginning of a new bull market or an unsustainable advance that is bound to roll-over. There's plenty of evidence to support both arguments from a fundamental, technical, and historical perspective.
However, one prominent piece of evidence is the number of distinguished voices warning of the risks of the current market environment. These have included Warren Buffett, Stan Druckenmiller, and David Tepper. All of these have outperformed for many decades. Now, we can add GMO's Jeremy Grantham to this chorus.
Fourth Bubble
In a CNBC interview earlier this week, Grantham said that investing in the stock market at current levels "is playing with fire". He doesn't believe the rally will last given its speed and scale and that it's happening during a period of economic weakness.
Grantham is a value investor. He thinks that U.S. stocks are overvalued, and emerging market equities are cheap and will outperform over the next, few years. Over the last 10 years, the S&P 500
The S&P 500 is about 40% higher than its March lows and 8.7% off its all-time high set in February of this year, while the emerging markets index is 30% higher and 18.9% off its all-time high from January 2018. Emerging markets have underperformed on nearly every timeframe, and Grantham is betting on a rotation.
Grantham's pessimism for U.S. stocks is primarily due to their extended valuations and the poor economic backdrop. He also cites the heavy involvement of retail trading and stocks in bankruptcy seeing big run-ups as all the hallmarks of a bubble.
Grantham's Career
GMO reduced its equity exposure from 55% to 25% earlier this month, as he believes that economic weakness is going to persist. His investing philosophy is based on shifting asset classes based on valuations and expected returns. Thus, he's betting on a "reversion to the mean" when valuations get stretched to the upside and downside.
This approach has allowed him to miss some of the most devastating bear markets such as 2000 and 2008, but he also typically misses out on the big gains in the latter parts of bull markets. For example, he's been underexposed to U.S. equities over the past couple of years. Some believe that stocks are going to be overvalued because there is an asset shortage relative to the number of investable dollars in the world especially with the Federal Reserve's low-interest-rate policy. Grantham has scoffed at this reasoning and said this is the type of thinking that creates bubbles.
