Grantham Sounds Bearish Warning With GMO Cutting Exposure

(Bloomberg) -- Jeremy Grantham, well known for his bearish market calls, is sounding another one, saying the “current market seems lost in one-sided optimism when prudence and patience seem much more appropriate.”

His comments come after his firm, GMO, said it was slashing its exposure to equities. GMO reduced the net equity exposure in its Benchmark-Free Allocation Strategy to 25% from around 55%, said Ben Inker, head of asset allocation, in a quarterly letter to clients Thursday that included a note from Grantham.

“We have never lived in a period where the future was so uncertain,” Grantham, 81, wrote. “The key here is uncertainty, which in some ways seems the highest in my experience.”

The coronavirus pandemic has taken a toll on the economy that isn’t being reflected in stock prices, he said.

The legendary money manager, who co-founded Boston-based GMO and is its long-term investment strategist, said that the price-to-earnings ratio for stocks is now in the top 10% historically, while the U.S. economy is in the worst 10%, or perhaps the worst 1%.

“This is apparently one of the most impressive mismatches in history,” he wrote.

The S&P 500 index has jumped 40% from its March 23 low through yesterday even as the pandemic has caused the worst unemployment since the Great Depression and damaged almost every sector of the economy.

Grantham said it’s anyone’s guess as to when the U.S. economy will recover.

“We really don’t know how long it will take,” he wrote. “Nearly certain is that a V-shaped recovery looks like a lost hope.”

Even if a vaccine for the virus were to be developed fast “there will remain deep economic wounds,” he added.

GMO managed about $60 billion as of the end of February.

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