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Jeremy Grantham: Train Wreck Spotter

| Last Updated: July 31, 2012 | Posted in: Individual Gurus

Guru Accuracy Rating
This is below average. Current guru average is 47%

A reader suggested that we evaluate the stock market forecasts of Jeremy Grantham, Chairman of GMO LLC. GMO LLC “is a global investment management firm committed to providing sophisticated clients with superior asset management solutions and services.” Its “client base includes endowments, pension funds, public funds, foundations and cultural institutions.” The predictions/recommendations evaluated here extend as far back as August 2000 and come from columns in MarketWatch, CNN/Money, TheStreet.com and directly from Jeremy Grantham’s quarterly letter published by GMO. The table below quotes forecast highlights from the cited source and shows the performance of the S&P 500 Index over various numbers of trading days after the publication date for each item. Grading takes into account more detailed market behavior when appropriate. Red plus (minus) signs to the right of specific forecasts indicate those graded right (wrong) based on subsequent market behavior, while red zeros denote any complex forecasts graded both right and wrong. We conclude that:

  • Most of Jeremy Grantham’s comments derive from his quarterly letter to clients and from media interviews.
  • His forecasts are generally long-term, but he occasionally comments about near-term expectations for the overall U.S. stock market. Evaluating long-term forecasts is problematic due to difficulty of constructing a large sample of reasonably independent forecasts.
  • He develops forecasts based mostly on fundamental valuation and macroeconomic/financial analyses, as modified by the effects of the Presidential term cycle.
  • Jeremy Grantham has been mostly negative about the prospects for U.S. equities (apparently since 1994), but not for international equities.
  • Jeremy Grantham’s forecast sample size is very small, so confidence in the measurement of his accuracy is very low.

His strong pessimism drives GMO managed funds toward the most stable (large capitalization) value stocks, and these funds have performed fairly well (reflecting perhaps a value premium rather than market timing).

See Guru Grades for a snapshot of the accuracy of various experts in predicting the direction of the U.S. stock market, including links to evaluations of the commentaries of other individual market pundits and gurus.

    S&P 500 Index  
Date Comments re:  Jeremy Grantham at MarketWatch, CNN/Money, Forbes, TheStreet.com and GMO,com 21-Day Return 63-Day Return 126-Day Return 254-Day Return  
7/31/12 …profit margin and earnings gains have finally
weakened a little. …price declines look more likely than before.
2.3% 2.4% 8.6% 23.1%
6/22/12 There’s nothing wrong with a little market optimism, but this just isn’t the time for it… 0.2% 9.4% 7.1% 20.3%
2/25/12 Heavily underweight U.S equities, but not the high quality quartile, which is almost fair price.  Non-quality
equities, in contrast, have a negative imputed 7-year return after their handsome rally in the last 3 months through to mid-February.  
3.3% -3.4% 2.5% 11.5%
12/5/11 …stay ducked until…the equity markets get to be cheap… 1.9% 6.9% 2.3% 12.8%
9/21/11 …he expects another leg down for the U.S. stock market, one where shares could stay low-priced for years. 4.2% 3.3% 20.2% 24.9%
8/11/11 …keep your head down.  And, more to the point, keep it down for the foreseeable future.  …however,…it’s
quite likely that the market will renew its fight to stay up for a few more months…
-0.9% 8.8% 15.3% 19.7%
5/11/11 …shareholders should take risk off the table now, rather than by October as he had advised earlier this year. “The environment has simply become too risky to justify prudent investors hanging around, hoping to get lucky… The market may still get to, say, 1,500 before October, but I doubt it.” -5.3% -12.6% -6.0% -0.3% +
1/28/11 As a simple rule, the market will tend to rise as long as short rates are kept low. This seems likely to be the case for eight more months and, therefore, we have to be prepared for the market to rise… Be prepared for a strong market…, but by October 1 you should probably be thinking much more conservatively. 2.3% 6.6% 1.9% 3.7% 0
10/27/10 …I expect that the bottom line will come down to
short rates. Surely they will stay low for the entire
Year 3. And, if so, the “line of least resistance” is for
the market to go up…
0.6% 9.7% 9.7% 8.7% +
7/20/10 I am still committed to my idea of April 2009 that there would be a “last hurrah” of the market… I would
still put odds of 45% (down from 50% last quarter) for the market to rise to over 1400 (down from 1500 to 1600 last quarter) by October of next year… On the other hand, I also have to recognize that the 21% I put on a quick and rapid decline to fair value looks even more likely today, perhaps closer to 30%.
1.0% 8.6% 19.4% 24.0% 0
4/30/10 …the line of least resistance is a market move in the next 18 months or so back to the old highs, say, 1500 to 1600 on the S&P, …followed once again by a very dangerous break. …there are several less likely outcomes that collectively…are equally probable. -9.8% -7.2% -0.4% 14.3%
1/21/10 …it seems likely to go through 1200 and possibly higher. The market, however, is worth only 850 or so; thus, any advance from here will make it once again seriously overpriced… The real trap here, and a very old one at that, is to be seduced into buying equities… -0.8% 8.0% -4.2% 15.6% 0
10/27/09 …the market “will drop painfully from current levels” before the end of next year, predicting a fall of roughly 20%. 4.4% 3.2% 12.0% 11.3%
7/27/09 The market’s recent surge is…not likely to carry investors much farther… …we recommend…lightening up on stocks until the S&P falls back to…around 880. 4.7% 11.3% 11.7% 12.2%
5/18/09 My guess is that the S&P 500 is quite likely to run for a while, way beyond fair value (880 on our revised data), to the 1000-1100 level or so before the end of the year. …A large rally here is…likely to prove a last hurrah…followed by a second decline… 0.1% 10.4% 19.5% 17.8% +
1/23/09 Grantham sees value in the markets. He recommends investors “slowly and carefully” invest cash into stocks… “But be prepared for a decline to new lows this year or next…Six hundred or below on the S&P 500 would be a more typical low than the 750 we reached for one day.”  -7.1% 2.4% 17.3% 31.9% +
10/25/08 …it is likely the market will break its recent lows as the world is faced with “a meat grinder of global earnings disappointments” in 2009….there’s a 70% chance the S&P will sink to 800, and a 30% chance it will touch 600. 1.0% -0.4% 0.7% 25.6% +
10/17/08 …he’s recently begun taking advantage of the pervasive fear in the market to scoop up stocks for his own account. “If prices keep looking attractive, my non-Berkshire net worth will soon be 100% in U.S. equities.” -13.7% -13.7% -15.5% 9.7%
8/29/08 “My advice would be, don’t take any risk.” …the outlook for equities worldwide, as Grantham sees it, is poor to middling. …the American market could turn out to be “a safe haven.”  -9.1% -30.8% -45.4% -22.5% +
10/24/07 His prediction for the next 12 months? “A modest up year… Any major bearish behavior is likely to wait for another 12 or 18 months.” -5.0% -10.8% -8.4% -44.0%
8/16/07 There is a lot of pain still to be had in the equity markets, particularly aimed at the risky end of the spectrum. We think the fair value on the market is about a third lower in the U.S… 4.6% 4.9% -4.4% -10.2% +
8/3/07 “The feeling I have today is that of watching a very slow motion train wreck.” 3.9% 8.1% -2.6% -10.0% +
6/11/07 “The first truly global bubble: From Indian antiquities to modern Chinese art; from land in Panama to Mayfair; from forestry, infrastructure, and the junkiest bonds to mundane blue chips; it’s bubble time!” He warns of a global mega-pop coming… 0.6% -3.7% -0.1% -11.2% +
4/27/07 Grantham sees two big potential catalysts that might turn this bull market into a bear: a surge in inflation…and a squeeze on profit margins… But here’s the kicker: Even Grantham thinks you probably need to be bullish right now. The reason? Most bubbles, he notes, go through a short but dramatic “exponential phase” just before they burst. …”My colleagues,” wrote Grantham, “suggest that this global bubble has not yet had this phase and perhaps they are right. … In which case, pessimists or conservatives will take considerably more pain.” 1.6% -0.8% 1.5% -5.7% +
1/30/07 “Everything is overpriced. This year the cheap asset class is cash.” …investors who buy, say, an index fund and hold it for the next seven years are likely to lose about 1.8% a year, after inflation. -1.8% 3.7% 3.2% -2.3% +
12/11/06 [Stocks] “look moderately more expensive. Much to my irritation. …Own as few U.S. equities as you can…Play it safe. Cash is perfectly fine.” 1.3% -1.8% 7.3% 3.9%
12/12/05 “The probable winning bet [is] a very mean reversal … for the next few years.” 2.1% 3.0% -2.9% 13.1%
3/13/05 …the market bottom will take until 2009/2010. -3.0% 0.3% 3.6% 9.1% +
1/2/05 …suggests shorting the S&P. -0.7% -2.2% -0.6% 5.9%
12/27/04 “The market is too high priced.” …What is the S&P 500 worth? “About 16 times earnings, which is about 725… This is an incredibly unchastened market. This is an aggressive, speculative market. …I…have minus 10% in S&P contracts.” -2.6% -2.5% -1.1% 4.4% +
11/15/04 “The low will come two or three years from now, at a level below 700 on the S&P.” …Avoid U.S. stocks. …Hold cash. …Your mattress may be the safest haven of all. 1.9% 1.9% -1.5% 4.0%
8/9/04 “…the highest return to risk that we have ever seen… The next two calendar years still look like a black hole, as overpriced markets, dangerous leverage, and a newly gigantic hedge fund business…collide with the housecleaning phase of the presidential cycle and the contraction phase of what has been a very long interest rate cycle…ice is getting thinner.” He considers suitable investment vehicles in this environment to be cash, conservative hedge funds and non-U.S. stocks.  4.8% 9.1% 12.9% 15.4%
6/24/04 Grantham spoke of a “bear market rally” that has lasted longer than usual… “This was a risk-taker’s year,” he said of the past 12 months. But that window is closing… -5.0% -2.4% 5.7% 4.4% +
11/2/03  Jeremy Grantham calls the current rally the “greatest sucker rally in history” 0.5% 7.3% 5.7% 10.1%
9/15/03 …”the market can hang in and do okay, up or down 10%, through the [2004] election. But following the election it will be a black hole.” 3.4% 5.6% 8.8% 11.2%
1/24/03 …equities are still expensive… -2.7% 5.8% 14.0% 31.0%
10/28/02 …fair value for the stock market is about 6240, or about 1,600 points below the Dow’s current level. …Warming to his role as stock market Cassandra–he’s been bearish since 1994–Grantham adds, “There are no rules. Who knows where the bottom will be some ugly August afternoon?” Based on past bear markets, he says, “it would be almost unusual not to reach the 5000s, and typical to go to the 4000s.” 2.6% -3.6% 3.1% 17.6%
6/25/02 “…price-to-earnings ratio for the S&P 500 is still way out of historical alignment. While it has fallen from a peak of 33, its current level of 25 is far higher than the 17 1/2 that…would reflect a century-long trend line. That number translates to an S&P of 750.  -14.1% -14.6% -8.2% 0.0% +
1/1/01 Some of the smartest investment thinkers…, such as …Jeremy Grantham…, believe we may be at the start of another period in which stocks will lag bonds–and may even lose money–for years. …Grantham…forecasts average annual returns over the next decade or so range from Grantham’s -2% 7.0% -10.7% -3.6% -9.9% +
8/23/00  “My guess is that…the stock market is so pathetically eager to see some improvement that there will be a knee-jerk rally of some 10 or 20 percent in the next few months.” But after that interlude, he expects a bear market to resume.  -3.8% -10.8% -16.8% -21.7%
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