Jeremy Grantham's GMO says stocks are overvalued by every metric, but there are 3 strategies investors can use to weather a crash

Jeremy Grantham's GMO says stocks are overvalued by every metric, but there are 3 strategies investors can use to weather a crash
Jeremy Grantham cofounded the asset management firm GMO. Boston Globe/Getty Images
  • Stocks worldwide are expensive and US stock valuations are at concerning levels, Jeremy Grantham's firm.
  • GMO defended its view from bears on social media who are frustrated by the firm's negative outook.
  • GMO sees negative returns for 10 of 11 asset classes over the next seven years.

Billionaire Jeremy Grantham's investment firm says stocks are too pricey, outlining their view as US equities sit at record highs, with the team offering their advice on how to navigate through what they call a global growth bubble.

"Global equity markets rallied impressively in the quarter, pushing some year-to-date numbers into double-digit territory only halfway through the calendar year," said GMO in its second-quarter outlook published this week. Grantham, co-founder of investment firm Grantham, Mayo, van Otterloo & Co., is a legendary investor who is well known for calling for a burst of the 1989 Japanese asset-price bubble, the 2000 tech bubble, and the 2008 real-estate bubble.

"It gives us no pleasure to remind our clients that U.S. stock valuations, by almost any backward or forward-looking measure that we've come up with, are at levels that concern us," said GMO's asset allocation team. "If one must own U.S. stocks, however, as many institutions and advisors do, we suggest leaning into value and cyclicals while maintaining a quality bias."

The S&P 500 index on Friday pushed its year-to-date advance to about 17%, overcoming a selloff this week. The benchmark has recently made a lengthy string of record highs fueled by expectations of strong corporate earnings expansion although investors have run into economic growth concerns as COVID-19 cases continue to mount worldwide.

GMO noted that the MSCI EAFE Index -- tracking stocks in Europe, Asia and Australia -- has packed on nearly 9% this year and the MSCI EM Index gauging stocks in 27 emerging market countries, has risen by more than 7%.


The firm foresees negative returns on an inflation-adjusted basis over the next seven years for 10 of the 11 asset classes it monitors. It expects a negative return of 8% in US large-cap stocks and of 8.5% in US small-cap stocks.

Read more: Morgan Stanley names 26 stocks outside the tech and media industries that have delivered market-beating growth in recent years - and look poised to continue that expansion in the future

"Meanwhile, many among the Twitter-sphere and other social media discussions have expressed frustration with GMO's bearishness," the firm said, saying it has heard people wonder if it isn't giving enough credit to some high-growth "disruptors" with new business models. It said it does have models that take into account current optimistic growth forecasts.

"Many individual companies are deserving of their current high multiples - we absolutely concede that somewhere in the global growth basket sits the next Amazon. Unfortunately, they're also ALL being priced that way, and for us, that is a bridge too far."

GMO said it has three actions it advises to clients traversing in a global growth bubble:


1) exploit the bubble with an equity long/short strategy

2) avoid the bubble by investing in alternatives

3) concentrate assets away from the bubble in emerging market value, Japan small value, cyclicals, and quality.

"We are loath to recommend a traditional 60/40 mix. There will come a day when global equities and government bonds are fairly valued and should deliver a "normal" real rate of return," it said. On that day, GMO will be the first in line to tell you to own that traditional mix."