The U.S. stock market isn’t in a bubble yet, but it’s getting close, said Jeremy Grantham, co-founder of GMO, the Boston-based asset management firm.
“We’re creeping to bubble land,” Grantham said at the Morningstar Investment Conference in Chicago on Wednesday. But he noted the stock market bubble won’t break when the Federal Reserve eventually raises interest rates.
“We need a trigger,” Grantham said. “Broadly overvalued markets won’t do it . . . We’re in a broadly overpriced market worldwide. The bond market is the most overpriced in history; fine arts sales are setting new records. These are not sufficient [for a trigger]. We need for individuals to become crazy buyers . . . Individuals are optimistic, but they’re not buying stock. No bubble has broken until individuals have poured into the market.”
He said there is a lot of hand-wringing over when the Fed will raise rates, but he reminded the audience the Fed raised interest rates eight times between 2004 and 2006 and the stock market still went up.
Grantham finds investing in the current market difficult, and said GMO is being prudent.
“I’m going to be very, very prudent closer to the election,” he said. “I recommend the same for you.”
He added another problem is Corporate America’s focus on the short-term by awarding stock options, buying back stock and pushing up profit margins at the expense of capital expenditures.
“We are buying stock back at a record rate, at a $700 billion annualize rate year-to-date. The ability to buy back stock and overwhelm earnings has a lot to do with how dismal capex is today,” Grantham said, adding that the lack of capex spending is a drag on economic growth.
Grantham said the push to focus on profit margins is not allowing the natural cycle of mean reversion to occur.
“For 20 years we’ve had abnormally higher returns. Instead of sucking in competition, we’re sucking in our own stock. We’re not expanding the economy because of high profit margins; we’re running away from it,” he said.