Which perma-bear's now bullish? (Hint: Grantham.)
It's an upbeat forecast that is surprising, perhaps, only for its source:Skip to next paragraph
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The US will move out of recession late this year or early next. There's a nearly 50/50 chance that the stock market has already seen its low for this cycle. The S&P 500 index will move up to 1000 or even higher before the end of this year.
Who's this new bull on the block? None other than perma-bear Jeremy Grantham.
Proven right, eventually
Since the late 1990s, he warned about overvalued stocks and financial bubbles, which finally came true with the pricking of the housing bubble and the deep recession that followed. (Despite missing the run-ups this decade, he still generates great respect from fans, such as here.) In March, when the market hit bottom, he also correctly wrote investors saying it was time to begin making large stock purchases because the S&P was undervalued and should be around 900.
On Tuesday, the index reached that level for the first time since January to close at 906. On Wednesday, Mr. Grantham published his latest shareholder letter, in which he formally parts company with his fellow bears, at least for a while.
"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 US and China, by late this year or early next year. (This seems about 80 percent 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," he wrote. "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."
Low-down on the low
"We are not trying to be bullish and we have no reputation as bulls, but ... three months ago we at GMO [his firm] collectively considered that a range of 550-650 for the S&P was about right for the low this time." (It bottomed at 666.)
But that's not the end of the story. Like Joseph in the Bible predicting seven years of famine after seven good years, Mr. Grantham sees years of slow growth ahead:
"The total market value of housing, commercial real estate, and stocks was about $50 trillion at the peak
and fell below $30 trillion at the low. This loss of $20-$23 trillion of perceived wealth in the US alone (although it is not a drop in real wealth, which is comprised of a stock of educated workers and modern plants, etc.) is still enough to deliver a life-changing shock for hundreds of millions of people. No longer as rich as we thought – under-saved, under-pensioned, and realizing it – we will enter a less indulgent world, if a more realistic one, in which life is to be lived more frugally. Collectively, we will save more, spend less, and waste less. It may not even be a less pleasant world when we get used to it, but for several years it will cause a lot of readjustment problems. Not the least of these will be downward pressure on profit margins that for 20 years had benefited from rising asset rices sneaking through into margins."
Annual growth at 2.5 percent?
So it's a more sober environment we'll face. (Click here to see what other longtime bears are predicting.) More Grantham:
"The world we are now entering will therefore tend to have lower (more realistic) profit margins and lower GDP growth. I expect that, at least for the seven lean years and perhaps longer, the developed world will have to settle for about 2 percent real GDP growth (perhaps 2.25 percent) down from the 3.5 percent to which we used to aspire in the last 30 years."
His long-term outlook for stocks isn't bullish at all:
"To be honest, I believe that most of you readers are likely to be grandparents before you see a new inflation-adjusted high on the S&P."
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