Most of the time major asset classes are
reasonably priced. So said Jeremy Grantham in a CNBC interview recently.
The real trouble with asset allocation is
that asset prices tend to move away from fair value. When price rises are very
rapid, impatience is followed by anxiety. Overvaluation is a necessary but not
sufficient condition for a “bubble burst”. The single most dependable feature
of late stages of great bubbles is crazy investor behaviour.
The “Buffett Indicator”, total market
capitalization to GDP, is well above its Year 2000 high. The Shiller CAPE is
above 30. Even with a slowdown and an uncertain recovery, the market is in
unprecedented territory. The mantra of late 2020 was the low interest rate will
prevent decline in asset prices. So, when is the last dance or when will the
music stop?
Shiller
PE Ratio as of 22/3/2021
Even with hindsight and sophisticated
modelling, it is difficult to pin the bubble. A guess is late 2021 or early
2022. Why? When recovery moves strongly, inflation rears its head and the Fed
begins to move interest rates upward, then we may see the end of the latest
dance. Intensity and enthusiasm of bulls, acceleration of its final lag are
other features of the end. Meantime, you will have bullish advice in a bubble. Beware!
Value stocks (in the U.S.) have had
their worst-over relative decade, followed by worst-ever year in 2020. Value
and Emerging Market equities are Jeremy Grantham’s choices for the immediate
future.
Reference:
1.
Jeremy
Grantham, Waiting For The Last Dance
2.
Buffett
Indicator, 18 March 2021, https://www.currentmarketvaluation.com/
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