|
|
|
|
Extra!
Get ready for a white-knuckle future
Jeremy Grantham doesnt think this is the end of the markets dips and dives. In fact, he thinks it'll be one heck of a ride down for the next 7 years. Here's why.
By Scott Burns
Jeremy Grantham wants to rain on the parade. Glorious uptick of the last three months notwithstanding, the Boston-based institutional money manager believes the decline of the U.S. stock market isn't over. He also believes stocks are still perilously overvalued. Worse, he believes they are destined to fall to below-average valuations.
The only question for him is, how long it will take?
To those who know Mr. Grantham, this is not news. He has been bearish on the U.S. stock market for so long that some observers, including some at the recent Undiscovered Managers Wealth Management Symposium in Chicago, believe it reduces his credibility as an observer.
In fact, there is a reason he has been bearish for so long. It's called history.
Here, extracted from his presentation, is why he believes we should remain cautious.
Bubbles disappear completely
Showing graphs of different bubbles versus their trend lines, Grantham points out that every bubble is symmetrical. If prices rise 100%, 200% or 300% over their trend, bursting the bubble ends with a retreat that goes back to the trend line. Then it continues and goes below the trend line.
While stocks rose well above the trend line in the 1920s, the crash that followed gave up all the gains and then went below the trend line. Ditto the 1946-'84 bull market: Stocks rose well above the trend line, and then fell far below it after the '73-'74 crash. There have been similar retrenchments in the Japanese stock market, in currencies and in commodities.
We act traumatized by losses (and many are) but large-cap stocks still sell at multiples of earnings, cash flow and book value that are far above their long-term norms -- and they are doing this in an interest-rate environment that offers no competition.
Stocks are still overvalued
By his measures, large-cap U.S. stocks are still priced in the top 20% of their historical range -- "the most expensive 20% of history." While real returns for common stocks have averaged 11% when stocks were relatively cheap, they have averaged 0% when they were this expensive. (It should be noted that Grantham doesn't have much company in this position: Steven Leuthold, who turned bearish for similar reasons, now sees stocks as reasonably valued. Others justify current pricing by pointing to current interest rates.)
Long-term returns will be weak
Making what he calls "kind" assumptions about the future, Grantham expects declining price-to-earnings ratios to offset all future gains from sales growth. This would result in an annual total return of only 1.4% for the next seven years. We could, of course, get to normal valuations faster by having another bear market leg down.
So where should we put our money? Where can we find investment opportunities rather than impending disasters?
Grantham is negative about large-capitalization U.S. equities. He's also negative about traditional bonds. But he is positive about international stocks (large- and small-cap), inflation-protected securities, international debt, REITs and long-term investments such as timber. (Timber, he points out, has provided a higher return than the S&P 500 Index ($INX), including dividends, for nearly a century.)
If he is right, the difference in return between now and 2010 will be major. While he expects U.S. large-cap stocks to provide real (inflation-adjusted) returns of only 1.4% annually, he's expecting U.S. small-cap stocks to provide 3.8%, REITs to provide 6.7%, large-cap international stocks to provide 7.6% and small-cap international stocks to provide 9.7%.
That's quite a range. Basically, he's saying that your real wealth may grow only 10% in large U.S. stocks or it may nearly double in small international stocks over the next seven years.
Will individual investors survive?
So is any small investor money positioned to profit?
While mutual fund investors have embraced REITs over the last two years -- witness the doubling of assets in the largest REIT fund -- funds that invest in foreign equities have suffered the same net redemptions that domestic equity funds have suffered, so there probably isn't much small-investor money where Grantham thinks future returns will be.
And what else will happen in the next seven years? The baby boomers will start to retire -- if they can afford it. Individual investors, still uncomfortable with the responsibility of 401(k) decisions, had best prepare for a white-knuckle future.
See Scott Burns' Web site.
|
|
|
|
