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GMO: "US Markets Are Not A Little Bit Overvalued — They Are Overvalued By A Hefty Margin"

Tyler Durden's picture


Monthly Market Commentary From Jeremy Grantham's GMO, via Wells Fargo Absolute Return Fund

“You want a prediction about the weather, you're asking the wrong Phil. I'll give you a winter prediction: It's gonna be cold, it's gonna be gray, and it's gonna last you for the rest of your life.”

     —From the movie Groundhog Day (1993)

The Street is always looking for short-term indicators. The January indicator is a common one: It basically says January sets the tone for the rest of the year. Or even the Groundhog Day effect, which also sent a nasty signal just recently. Clearly, these two are pointing to a sober 2014. Look, maybe these indicators work. Maybe they don’t. Trying to find a reliable one-year crystal ball is a fool’s errand. Our sober forecasts for equities, especially the broad basket of U.S. equities, have nothing to do with January pull-backs or silly little rodents seeing their shadows. Our methodology is a bit more ho-hum. Valuations are stretched. Profit margins are stretched. And given that these two have been reliable mean-reverting indicators, they are what drive our sobriety. We’re not saying the party’s over. For all we know, 2014 could post another positive year for the risk markets. There’s enough good news out there in terms of cash on the sidelines, declining unemployment numbers, U.S. as a safe haven in the event of an emerging meltdown ... yada, yada, yada. All we’re saying is that, as value investors, we’re nervous about the longer-term prospects for equities, especially in the U.S.  Markets in the U.S. are not a little bit overvalued—they are overvalued by a hefty margin, especially small-cap stocks. And it is this concern, above all else, that will be driving our asset allocation decisions. 

Market update

Momentum from a spectacular 2013 and some early positive economic news sent U.S. equities up to record highs in mid-January. Markets did an about-face, however, toward the end of the month as the Federal Reserve reminded us that the taper would not just continue but accelerate, as a weak Purchasing Managers’ Index reading came from China and fears of a slowdown continued, and as emerging markets currency troubles spooked the global markets. Emerging equities (and currencies) were the worst victims, but the developed markets also felt the pinch. U.S. equity markets did indeed experience a January pull-back, with the S&P 500 Index down 3.5% and the Russell 2000® Index down 2.8%. EAFE lost 4.0%, spread pretty evenly across Europe and Japan. The real story in January, however, was emerging equities, which gave back 6.5%, as measured by the MSCI Emerging Markets Index.  

For fixed income, January’s hiccup ended up being good news, as yields came in modestly higher. The Barclays U.S. Aggregate Bond Index posted a solid 1.5% return, and global bonds did slightly better.

Wells Fargo Advantage Absolute Return Fund

Against this backdrop, the Absolute Return Fund lost 1.8% on the month. Our quality position, which has often held up relatively well in market downturns, was essentially down in line with the broad indexes. Concern about global, particularly emerging markets economic exposure, was most likely the culprit. Consumer staples—a traditional defensive sector—was one of the worst-performing areas this month, as the market perceived that slowdown outside of the U.S. would hurt earnings for these high-quality global brands. Our international value exposure did slightly better than international growth sectors, but only marginally. And both, importantly, were still down. Our emerging equities exposure was the largest negative contributor.  

On the fixed-income side, emerging country debt exposure hurt, but the TIPS position that we established back in July and August 2013 posted some positive returns. In addition, our absolute return strategies, the GMO Alpha Only Fund and the GMO Alternative Asset Opportunity Fund, each posted positive returns, albeit modest.

By the end of January, equities represented a bit over 50% of the portfolio. We hold a diversified equity basket across quality, currency-hedged international value, and emerging, with a modest allocation to the risk premium strategy. We are maintaining roughly a 9% allocation to credit via asset-backed securities and the GMO Emerging Country Debt Fund. Treasury Inflation-Protected Securities holdings represent roughly 13%, while our absolute return sub-strategies, in aggregate, represent a bit over 27%.


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Tue, 02/18/2014 - 21:08 | Link to Comment NoDebt
NoDebt's picture

Did he just say "cash on the sidelines"?

Tue, 02/18/2014 - 21:11 | Link to Comment LetThemEatRand
LetThemEatRand's picture

I'll take this author on the roof of a skyscraper for $2000, Alex.

Tue, 02/18/2014 - 21:31 | Link to Comment Wahooo
Wahooo's picture

No, he said to hold half your assets in equities.

Wed, 02/19/2014 - 01:55 | Link to Comment TheRideNeverEnds
TheRideNeverEnds's picture

Maybe they didn't see it, perhapse it is obscured by all the green shoots? 

Tue, 02/18/2014 - 21:08 | Link to Comment localsavage
localsavage's picture


Tue, 02/18/2014 - 21:09 | Link to Comment Carpenter1
Carpenter1's picture

Fewer and fewer buyers until the FED has to decide if it wants to be the obvious only buyer of equities.  


IF something cannot go on forever,  it will end.I

Tue, 02/18/2014 - 21:09 | Link to Comment LetThemEatRand
LetThemEatRand's picture

Bullshit, bullshit, bullshit, bullshit, send us more of your money, I just bought a new Range Rover, hey that bridge looks cool, I need to check my nail supply, bullshit, bullshit, bullshit.

Tue, 02/18/2014 - 21:12 | Link to Comment fijisailor
fijisailor's picture

So EVERYONE is saying stocks are over valued.  Who the hell is buying that shit then?

Tue, 02/18/2014 - 21:19 | Link to Comment Winston Churchill
Winston Churchill's picture

I'm not sure anybody is.
If they lie about multiple things, maybe everything
is a lie.
Damn ,that steak tastes good.

Tue, 02/18/2014 - 22:45 | Link to Comment AmericasCicero
AmericasCicero's picture

My mind is telling me that it is juicy and delicious

Tue, 02/18/2014 - 22:20 | Link to Comment DavrosoftheDaleks
DavrosoftheDaleks's picture

Corporate buybacks...and Carl Icahn, since his investments keep going up and he's cashing out and buying new things.

Tue, 02/18/2014 - 21:31 | Link to Comment RaceToTheBottom
RaceToTheBottom's picture

My money isn't "on the sidelines" it is in Gold and Silver.  And there it will stay, Asshats.

Tue, 02/18/2014 - 21:52 | Link to Comment TheRideNeverEnds
TheRideNeverEnds's picture

Valuation is in the eye of the bagholder.  

Tue, 02/18/2014 - 21:56 | Link to Comment deflator
deflator's picture

Our star player is on the sidelines and we are still winning by a blowout.

Tue, 02/18/2014 - 21:56 | Link to Comment yrbmegr
yrbmegr's picture


Tue, 02/18/2014 - 22:00 | Link to Comment Dr. Engali
Dr. Engali's picture

Fuck Wells Fargo and that criminal oligarch Buffet too.

Wed, 02/19/2014 - 00:10 | Link to Comment Colonel Klink
Colonel Klink's picture

Yep if it's got Wells Fraudco in the name I wouldn't trust it as far as I could throw it.

Tue, 02/18/2014 - 22:01 | Link to Comment kito
kito's picture

hahahaha, jeremy grantham, whose famous last words before he lost credibility were "we will not see a new high in the s&p in our lifetime". the fed has shredded diced and sliced anybody and everybody who dare utter antithetical words!!!

Wed, 02/19/2014 - 08:59 | Link to Comment Rising Sun
Rising Sun's picture

ah fuck, the US economy is under valued.


50M Americans on food stamps is hugely bullish.  Don't you get it????


Oh, and fuck you and your family Barry!!!

Wed, 02/19/2014 - 15:51 | Link to Comment TheRedScourge
TheRedScourge's picture

The author is wrong, small caps are the least overvalued if you actually bother to check the valuation of the majority of stocks out there. There's still some with Price to Sales ratios under 3, which is mostly untrue of most stocks with over a $10 billion market cap.

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