By David Berman
The latest quarterly note from Jeremy Grantham, chairman of the international investment firm GMO LLC, was released a couple of weeks ago, but you will still appreciate its relatively timeless content. As regular readers of this blog no doubt know, we're big fans of Mr. Grantham and rarely miss an opportunity to delve into his latest views on the stock market.
As a reminder, he turned bullish on the market last year when it seemed the financial world was about to spin off its axis. With the amazing rally since then, he's turned cautious -- and remains so. But this is no pouting bear who missed a winning opportunity. Instead, Mr. Grantham thinks high qualtiy stocks could still shine.
But first, his concerns. He still believes that the fair value of the S&P 500 is about 850, or 23% below its current level -- even though it could continue to overshoot fair value and rise above 1200. That is partly because investors have merely reacted to ultra-low interest rates by steering clear of cash and jumping into stocks.
"Equity markets almost always peak when rates are low, so moving in desperation away from low rates into substantially overpriced equities always ends badly," he said in his note.
The good news, though, is that he believes the risky stocks are already extremely overpriced. If the market climbs higher, the rally will probably be more broad-based, rewarding high-quality stocks.
"And if the market surprises me and goes into an early setback in 2010, then quality stocks should outperform by a lot," he said. "For the longer term, the outperformance of high quality U.S. blue chips compared with the rest of U.S. stocks is, in my opinion, 'nearly certain' (which phrase we at GMO traditionally define as more than a 90% probability)."
You should be able to read the full text here.
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