Trader’s Narrative

One of the sophisticated investors I track is Jeremy Grantham of GMO. Back in 2007 he warned that the financial world was full of bubbles. The only asset class he liked then was an alternative one: timber.

He was right of course. Bubbles popped in the credit market, mortgages, real estate, the stock market, etc. Then in early 2009 just in time for the March rally he began to soften his staunchly bearish stance and then ultimately became bullish at those valuations: Reinvesting When Terrified.

Setting aside these two calls, Grantham is a long term market timer. He’s not interested in catching short term fluctuations nor would he be able to exploit them since he manages billions in assets as an institutional money manager. With that in mind, here is a chart - released today - of GMO’s most recent 7 year asset class return forecast:

To download the full reports, register then login at GMO’s website. To sum up, they predict that:

• the S&P 500 will return less than 5% annually over the next 7 years.
• international equities are expected to perform better, but not by that much
• US government bonds are among the lowest return asset class (1.7%)
• once again, timber makes an appearance with a 7.5% expected return

In comparison, GMO’s prediction of asset class returns just before the financial markets went into a tailspin in 2007 looked quite different:

• the S&P 500 forecast was -2%
• US ‘low quality’ stocks were expected to return -10%
• US government bond returns were forecast at just 3%
• and timber was still high, at 6.5% annual return

Clearly, GMO is signaling that they expect the US equity market to recover. Their ‘highest quality’ US equity forecast was 4.2% in October 2007 while it currently stands at 11.8%. Time will tell if they will continue to be correct.