Are stocks about to crash?
About a year ago GMO’s Jeremy Grantham was very bullish. The S&P500 was around 1,800 points and Grantham made a prediction that in the year or two the market would rally 20 per cent to 30 per cent.
With the S&P now at 2052 and up 14 per cent since his previous bullish call, we thought it would be prudent to read his letter entitled Bubble Watch Update included in the latest quarterly report to GMO investors.
To save you some time, the following quotes seem pertinent:
“As always, the prudent investor…should definitely recognize overvaluation, factor in regression to the mean, and calculate the longer-term returns that result from this process. More easily, such prudent investors can use our seven-year numbers, which have a decent long-term record measured when we have viewed markets as overpriced, as we believe they are today, and a better record measured in the periods after bubbles break. The other necessary ingredients to the investment mix are suitable measures of risk, and when these are added to estimated returns we believe efficient portfolios can be produced. On our data, with U.S. large cap equities offering negative returns (-1.5%) except for high quality stocks (+2.2%), with foreign developed and emerging equities overpriced (+3.7%), and with bonds and cash also very unattractive, investors have to twist and turn to find even a semi-respectable portfolio. It is a particularly tough process today with nowhere to hide and no very good investments compared to, say, the time around the 2000 bubble when there were several.”
“My personal fond hope and expectation is still for a market that runs deep into bubble territory (which starts, as mentioned earlier, at 2250 on the S&P 500 on our data) before crashing as it always does. Hopefully by then, but depending on what the rest of the world’s equities do, our holdings of global equities will be down to 20% or less. Usually the bubble excitement – which seems inevitably to be led by U.S. markets – starts about now, entering the sweet spot of the Presidential Cycle’s year three, but occasionally, as you have probably discovered the hard way already, history can be a snare and not a help.”
You can read the full letter here quarterly letter to GMO clients.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
xiao fang xu
:
“The S&P 500 closed at 1527 on March 24, 2000. (Intraday high: 1553)
Go to the Bureau of Labor Statistics’ inflation calculator. Type in 1527 into the box. Select 2000. Click “Calculate.” This number appears: 2105. That is where the S&P 500 should be to compensate for price inflation. This is break-even, before taxes.
Then the investor pays 23.8% in capital gains taxes on any increase above 1527.
The S&P 500 closed on November 20, 2014 at 2053.
Anyone who bought and held a no-load S&P 500 index fund on March 24, 2000 has lost 23.8% on any nominal profits. So, there were no profits. There were losses. The investor did not come close to break-even.
To experience this loss of wealth, he did not use that money for over 14 years.
What about dividends? Dividends were low, 2000-2014: around 2%. They were taxed at ordinary income rates.”
Peter
:
Thanks as always for the regular updates. In his letter Jeremy refers to John Hussman who’s recent weekly market comments are certainly worth a read by anyone interested in about the state of the US market. The can all be found here http://www.hussmanfunds.com/index.html
Cheers,
Peter