The S&P 500 Index (SPX) has soared to new all-time highs, and many investors are concerned about when the inevitable reversal will come, how deep it will be, and how long it will last. The asset allocation team at Boston-based investment management firm Grantham, Mayo, & van Otterloo (GMO), co-founded by famed money manager and market guru Jeremy Grantham, forecasts years of negative returns ahead.
Specifically, GMO projects that large cap U.S. stocks, such as those in the S&P 500, will deliver inflation-adjusted real returns of about -2.7% per year over the next 7 years, according to a report in Business Insider. This would represent a significant turnaround, given that U.S. large caps have been the star performers, while shares of smaller firms have sunk over the past year.
- Large cap U.S. stocks will post negative real returns for the next 7 years.
- International stocks offer attractive valuations and will rise.
- Bonds will not offer a safe haven.
Significance For Investors
Grantham has a long history as a bear, and he predicted the 2000 and 2008 market crashes. GMO manages about $60 billion in assets.
GMO studied 11 asset classes and concluded that emerging market stocks, particularly emerging market value stocks, have the brightest prospects over the next 7 years. GMO projects average annual real returns of 5.0% and 9.5%, respectively, for these asset categories. They also forecast 2.3% annual real returns for international small caps and 1.2% for international large caps.
"The valuation gap between U.S. and international equities is closest to the widest it has ever been," BMO writes, per BI. "We continue to favor emerging markets equities, particularly emerging market value, and see some appeal in international value stocks. In the U.S., small-cap value is a pocket that has become quite attractive to us," they add. BMO did not issue a numeric forecast for U.S. small cap value, but they expect that U.S. small caps as a whole will eke out a mere 0.1% average annual real return in the next 7 years.
In general, GMO believes that reasonably priced value stocks, which had been laggards in recent years, are now poised for a comeback. As growth stock valuations get increasingly lofty, value stocks with long histories of solid earnings, cash flows, and dividends should have increased appeal.
Meanwhile, GMO predicts negative real returns for all 4 categories of debt that they studied: U.S. bonds, hedged international bonds, emerging market debt, and U.S. inflation-protected bonds. This is definitely a contrarian call, given that debt is a traditional safe haven for investors who are worried about stock valuations. Indeed, bond ETFs are enjoying record inflows for that very reason.
Jeremy Grantham and his colleagues at GMO are not alone in predicting a sharp deceleration in stock market gains going forward. Other noteworthy figures include economist Robert Shiller, Jim Paulsen of The Leuthold Group, and Scott Minerd of Guggenheim Investments, as detailed in a previous story. They all assert that recent returns are not sustainable going forward, based on history.
For their part, Grantham and GMO have gotten more pessimistic in recent months. In March, as detailed in that same story, they were forecasting real returns on U.S. stocks in the range of 2% to 3% annually for the next 20 years, versus an average of about 6% during the last 100 years.