- Jeremy Grantham — the legendary cofounder and chief investment strategist of Grantham, Mayo & van Otterloo — calls the deepening chasm between the stock market and the underlying economy “one of the most impressive mismatches in history.”
- He notes unemployment, GDP, vaccine uncertainty, “thousands” of bankruptcies, and huge piles of corporate and government debt as reasons for his concern.
- GMO’s net equity exposure in their Benchmark-Free Allocation Strategy has been reduced from 55% to about 25%.
- Grantham is skeptical over the idea that a vaccine for the coronavirus will serve as a cure-all for the economic damage that’s already been inflicted.
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Jeremy Grantham — the legendary cofounder and chief investment strategist of Grantham, Mayo & van Otterloo — has a knack for calling equity bubbles. Over the past 33 years, he’s three-for-three.
“We exited Japan 100% in 1987 at 45x and watched it go to 65x (for a second, bigger than the U.S.) before a downward readjustment of 30 years and counting,” he penned in quarterly note. “In early 1998 we fought the Tech bubble from 21x (equal to the previous record high in 1929) to 35x before a 50% decline, losing many clients and then regaining even more on the round trip.”
He added: “In 2007 we led our clients relatively painlessly through the housing bust.”
Still, regardless of Grantham’s impressive track record, the emergence of a global pandemic is something he — and no one else for that matter — has any experience navigating.
“This event is unlike all those,” he said. “This is why Ben Inker, our Head of Asset Allocation, is nervous and this is why you are nervous, or should be.”
Grantham notes skyrocketing unemployment, huge piles of corporate and government (peacetime) debt, the potential for “thousands” of bankruptcies, dismal GDP projections, uncertainty surrounding a vaccine, and uncertainty surrounding the timeline for an economic recovery as justification for his uneasy feeling towards markets.
“The virus is a bottomless pit of complexity, contradictory data, and guesswork,” he said.
Given that backdrop, Grantham thinks that the US market trading at a current price-to-earnings ratio in the top 10% of its history is, well … odd.
“The U.S. economy in contrast is in its worst 10%, perhaps even the worst 1%,” he said. “So, in terms of risk and return – particularly of the worst possible outcomes compared to the best – the current market seems lost in one-sided optimism when prudence and patience seem much more appropriate.”
He added: “This is apparently one of the most impressive mismatches in history.”
As a result, GMO’s net equity exposure in their Benchmark-Free Allocation Strategy was cut from 55% to closer to 25%.
“The best possible outcome would be that there will be, almost miraculously, billions of doses of effective vaccine by year-end,” he said. “But most viruses have never had a useful vaccine and most useful vaccines have taken well over five years to develop and when developed have been only partially successful.”
He added: “And even if all works out well with a vaccine there will remain deep economic wounds.”
With all of that under consideration, Grantham makes it a point to demonstrate that “there are no certainties” moving forward. However, he seems fairly confident that a snap-back recovery isn’t in the cards.
“Nearly certain is that a V-shaped recovery looks like a lost hope,” he said.
