The U.S. market is unlikely to “go bang” the way some have in the past, says Jeremy Grantham, chief investment strategist and co-founder of asset management firm GMO. In a recent Barron’s article, Grantham argues that we are not facing a “classic bubble, not even close.”
In Grantham’s opinion, it is more likely that a correction, or mean reversion, will be “slow and incomplete,” leading to “dismal consequences for investors: we are likely to limp into the setting sun with very low returns.” He cites factors such as the decade-long decline in interest rates and a shift in the global economy as contributing to the “broad shift in available returns.”
The pain resulting from a mean reversion, Grantham argues, could occur intensely in the short-term or in a longer, more drawn-out form. He makes a case for the latter, predicting what he refers to as a “20-year whimper”:
- Investment bubbles require investor euphoria related to “abnormally favorable fundamental conditions” that investors extrapolate into the future. Grantham argues that today’s market does not reflect such fundamentals, however.
- Classic bubbles, he says, “have always required that the geopolitical world is at least acceptable, more usually well above average. Today’s, in contrast, you can easily agree is unusually nerve-wracking.”
- The current market is extremely “nervous” and has been for some time. “Investor trepidation is so great that many are willing to tie up money in long-term government bonds that guarantee zero real return rather than buy the marginal share of stock.” This situation is “utterly unlike the end of the classic bubbles.”
Grantham concludes that “the current market therefore is closer to an anti-bubble than a bubble. In every sense, that is, except one: Traditional measures of value score this market as extremely overpriced by historical standards.”