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Tuesday, October 27, 2009

Jeremy Grantham Stock Market Outlook 2009-2010

Jeremy Grantham just released his Q3 Client Letter (Just Desserts and Markets Being Silly Again) on his outlook on US Economy and Stock Market.

Hmm... is he hinting about a repeat of 1929 – The Last Hurrah and Markets Being Silly Again – after the sharp decline in the fall of 1929, the S&P500 rallied 46% from its November low, then fell over 80%.

Other key points to note:

  • It still seems a safe bet that seven lean years await us.

  • Fair value on S&P is now about 860. This places today's market (October 19) at almost 25% overpriced.

  • We face a seven-year future that almost everyone agrees will be tougher than normal.

  • We are nervous about a possibility of a major shock to Chinese growth (a one in 3 chance that a major China stumble in the next 3 years).

  • What will stop this market in the first few months next year? A combination of 2 factors:
  1. Disappointing economic and financial data will begin to show the intractably long-term nature of some of our problems, particularly pressure on profit margins as the quick fix of short-term labour cuts fades away.

  2. Slow gravitational pull of value as US stocks reach +30-35% overpricing in the face of an extended difficult environment.

  • On a longer horizon of 2 to 10 years, resource limitations will also have negative effect.

  • Before next year is out, the market will drop painfully from current levels. “Painfully” = starts at -15%. US market will drop below fair value, which is a 22% decline from S&P500 level of 1098 on October 19, 2009. I think history books will be happy enough with 666 of last March, probably slightly happier with say 550.

  • The irony is 9 months of weak economic data this year has been accompanied by a very strong market, so the strong economic data next year is likely to be accompanied by a weak stock market.

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