GMO Chairman Jeremy Grantham released his first-quarter letter today. While Grantham reiterates some of the points GMO made in its first-quarter update (which we reviewed yesterday), he adds a good deal of new predictions and analysis, and his exceptional track record merits a quick look at some of his key points, beginning with the good news:
- Grantham sees it as “about 80% probable” that the massive global stimulus programs will “kick up” the economies of at least some larger countries, including the U.S. and China, by late 2009 or early 2010;
- While he sees fair value for the S&P 500 at about 880, he thinks the massive government stimulus program and the Federal Reserve’s moral hazard will spur the index to the 1000-1100 range by year-end;
- It is “almost 50/50” that we’ve seen a low for this bear market, according to Grantham;
- The current bear might not get as bad, valuation-wise, as bear markets like 1973-74 and 1980-82, because interest rates were very high during those bears, offering competition with stocks, and because inflation was also very high, which generally leads to lower P/E multiples. Oil supply crises also hurt stock values back then. “Without these extra negative factors, the current market seems unlikely to overcorrect below fair value quite as badly as these prior bear markets have,” Grantham says.
- The current bear also might not get as bad, valuation-wise, as the 1932 bear low or the 1990 Japan bear, because those were not met with the kind of massive stimulus we’re seeing now, which “might well kick up in time to clip off the last stage of the bear market”, Grantham says.
Now, for Grantham’s not-so-pleasant predictions:
- The massive loss of perceived wealth in stocks and housing will lead to “readjustment problems”, putting downward pressure on profit margins for many years;
- We may need seven years or so to work off enough debt for normal debt/collateral ratios to resume;
- He thinks real GDP will grow at about 2% to 2.25% in the developed world for at least seven years, as opposed to the 3.5% figure we’ve become accustomed to;
- Lower profit margins and GDP growth will lead to an extended period of below-average P/Es;
- Because of all that, the market’s rebound will likely be followed by a “long, boring period”, and it will be at least seven years before we reach a new market high in real terms.