Jeremy Grantham was one of the few forecasters to call the crash, He was also one of the few to call the bottom two months ago–publishing “Reinvesting While Terrified” on the exact day the market bottomed.
And now, in his quarterly letter, the great Grantham has a surprise for those expecting a return to unremitting gloom: He’s (mostly) bullish!
Yes, stocks have once again reached fair value, which means there’s no enticing valuation opportunity. But what the bears are missing, Grantham says, is that the entire world is now pumping more stimulus into the system than the entire world has ever seen. And stimulus has a much bigger impact on stocks than it does on economies, Grantham says.
Alas, all is not champagne and roses. After the market enjoys its little rocket ride through the end of the year, when everyone is finally certain that it’s not a sucker’s rally but a great glorious new multi-year bull market, stocks will crash and stay in the dumps for the better part of the decade. So enjoy the ride while you can.
Excerpt from Grantham’s Q1 letter here. Full letter from GMO.com embedded below.
Just bear our two principles in mind. If the stock market is many times more sensitive to ﬁnancial stimulus in the short term than the economy is [Grantham’s data suggests it is], then we could easily get a prodigious response to the greatest monetary and ﬁscal stimulus by far in U.S. history.
Second, if you don’t think there is a special, one-off, super colossal dose of moral hazard out there today, you are sadly uninformed. The moral hazard in play today is of a massively larger order than any we have ever seen. (But given how strangely selective the moral hazard or bailouts have been, it is enough to make those susceptible to conspiracy theories think in terms of a ﬁnancial maﬁa led by You-Know-Who. Too much seems to depend on which friends you have.)
So by analogy to the normal Presidential Cycle effect, driven by stimulus and moral hazard, we are likely to have a remarkable stock rally, far in excess of anything justiﬁed by either long-term or short-term economic fundamentals.
My guess is that the S&P 500 is quite likely to run for a while, way beyond fair value (880 on our revised data), to the 1000-1100 level or so before the end of the year. (For the record, I presented this case six weeks ago in Europe at 725 on the S&P, but was sadly distracted in my quarterly letter writing by a trip to Bhutan. Poor thing. I won’t complain, though, since my “Reinvesting When Terriﬁed” was posted on the day the market hit its low. You win some and you lose some.)
The market always anticipates an economic recovery and, sometimes, it must be admitted, there are several false moves (“suckers’ rallies”) before the recovery takes place. The current stimulus is so extensive globally that surely it will kick up the economies of at least some of the larger countries, including the U.S. and China, by late this year or early next year. (This seems about 80% probable to me, anyway.)
Anticipating this, we should expect a stock market recovery – which normally leads economic recovery by six months, plus or minus two – sometime between two months ago and, say, August, which the astute reader will realise implies that this rally may already be it.
This was part of the logic behind my March posting, “Reinvesting When Terriﬁ ed”: the uncertainties of the economy are so great that when the uncertainties of the stock market’s anticipation are laid on top of them, you simply must have big ranges of outcomes and hedge your bets. Unless you have extreme luck or divine guidance, you will never catch the low.
Alternatively, there is still time – just – for another freefall leg, but time is running out. Investor conﬁdence is still fragile, and should we get a series of particularly shocking data points, which, in the unique position we ﬁ nd ourselves is quite possible (say, one out of three), then conﬁdence could crack one more time and the market could go to a new low before the major anticipatory rally I’m describing. (This would make the current rally a short-term head fake.)
In a rally to 1000 or so, the normal commercial bullish bias of the market will of course reassert itself, and everyone and his dog will be claiming it as the next major multi-year bull market. But such an event – a true lasting bull market – is most unlikely.
A large rally here is far more likely to prove a last hurrah … a codicil on the great bullishness we have had since the early 90s or, even in some respects, since the early 80s. The rally, if it occurs, will set us up for a long, drawn-out disappointment not only in the economy, but also in the stock markets of the developed world.
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