â€œ â€˜I am doubling down, because as prices move further away from trend, at accelerating speed and with growing speculative fervor, of course my confidence as a market historian increases that this is indeed the late stage of a bubble. A bubble that is beginning to look like a real humdinger.â€™ â€
That is Jeremy Grantham, co-founder and chief investment strategist at Boston-based money manager Grantham, Mayo, Van Otterloo & Co., in a research report dated Tuesday after a particularly withering year for his investment outfit in 2020.
Granthamâ€™s bearish view on valuations was reflected in GMOâ€™s investment strategy which trailed the S&P 500 index SPX, +0.71%, according to a report byÂ Bloomberg News late last year which noted that clients had pulled $2.2 billion from the fund as of November 2020.
Last year was a remarkable year for risk assets in the face of a global viral epidemic that left equity indexes initially reeling in the spring, only to stage a spectacular rebound in the ensuing months as fiscal and monetary policy contributed to an economic recovery.
The S&P 500 SPX, +0.71% and the Dow Jones Industrial Average DJIA, +0.55% posted impressive gains in 2020, despite an initial bear market a decline of at least 20% and a recovery from those March lows of over 60%, while the Nasdaq Composite Index COMP, +0.95% surged more than 80% from its nadir.
The Dow Jones Industrial AverageÂ finished 2020 up 7.25% in 2020, while the S&P500 index gained 16.26% and the Nasdaq CompositeÂ returned 43.64%.
Grantham however says that the marketâ€™s bubblicious state has accelerated since he last declared values inflated and referenced a quote often attributed to famed economist John Maynard Keynes stipulating that â€œthe market can remain irrational longer than you can remain solvent.â€
In Granthamâ€™s words â€œeither way, the market is now checking off all the touchy-feely characteristics of a major bubble.â€
He also mentions the surge in interest in electric-vehicle makers like Tesla Inc. TSLA, +0.73% as evidence of the marketâ€™s speculative fervor.
â€œThe most impressive features are the intensity and enthusiasm of bulls, the breadth of coverage of stocks and the market, and, above all, the rising hostility toward bears,â€ he writes.
Whatâ€™s a prudent investor to do with one of the legends of Wall Street signaling caution is warranted?
Grantham says assets considered value, or trading at a discount based on some metric and emerging markets may be better bets in the near term. He said such bets go â€œalong with the greatest avoidance of U.S. Growth stocks that your career and business risk will allow.â€