Shiller, Grantham: “Market is overvalued (again)”
Two astute market observers – Robert Shiller and Jeremy Grantham – recently weighed in with their take on the market after its 60% run-up from the March lows and came to the same conclusion: it’s once again overvalued.
Not massively, mind you, but enough to cause concern. While neither is predicting another crash – at least not immediately – both are far less optimistic about the market’s prospects now than when they looked at it earlier this year.
Grantham expressed his views in his Q3 2009 letter (also see below for embedded document). In it he says that while the good news is we haven’t fallen into another Great Depression, this doesn’t mean everything is fine either, and “it still seems a safe bet that seven lean years await us.”
Looking at the market, Grantham estimates the S&P 500′s fair value to be about 860, which means at current levels (about 1035) the market is overpriced by over 20%. Although he’s not looking for it to make new lows, he expects to see it fall below fair value again, and that sometime before the end of next year it will drop “painfully” (at least by 15%) from current levels.
That being said, Grantham is currently now only modestly underweighted in equities, having recently taken some “chips off the table.” The reduction would have been greater except for the fact that he’s still able to find some groups of equities that he considers close to fair value, with U.S. high-quality blue-chip stocks being particular standouts in that regard.
Grantham notes that they’ve remained relatively cheap while investors chase after “junk and other risky assets.” Quality stocks, he says, have proven to be the one “free lunch” for investors over the long run, and his seven-year forecast shows them outperforming the S&P 500 by a significant margin.
While Grantham doesn’t mention dividends specifically, it goes without saying that most quality U.S. stocks pay dividends, and that these undoubtedly account for more than a small degree of the group’s relative attractiveness. For some high-quality U.S. dividend stock suggestions, see the previous post which attempts to find the best values among top U.S. dividend stocks at current market levels.
Grantham’s full comments can be seen below:
GMO – Q3 Oct 09 letter – Grantham
Robert Shiller expressed his views in a recent Tech Ticker video interview (3:15):
Like Grantham, Shiller sees the market as currently overvalued, with his P/E10 ratio up to almost 20, compared to an historical average of about 15. That doesn’t mean you should be completely out of the market he says – historically, “even when it’s been this high [the market's] done all right.”
However, “given the economic situation” he remains worried about the stock market and sees “some irrational exuberance still in the system.” As a result, he says, he doesn’t feel the current bull market (in stocks and housing) can be trusted to continue.
For more on Shiller’s P/E10 valuation model, you can download a spreadsheet with the latest P/E10 data from Shiller’s website. You can also use an online P/E10-based stock returns predictor at Early Retirement Planning Insights to see how various market P/E10 values affect S&P 500 returns at 10 to 60 years into the future.
Related posts:
Shiller: The market hasn’t been this cheap in decades
Online stock returns predictor based on shiller’s p/e10
Another take on Shiller’s PE10
‘Perma-bear’ Grantham: “It’s time to buy”
