US market is overvalued. GMO’s revised model says expected return is minus 1.3% for next seven years

19th November 2013

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The US market is overvalued according to fund manager GMO’s co-head of asset allocation Ben Inker. The fund firm has completed a revision of its forecasting methods, outlined in detail in the group’s quarterly newsletter in the link below, but the conclusion has not altered significantly.

The firm says that on its new model, fair value for the S&P 500 is about 1100 and the expected return is -1.3% per year for the next seven years after inflation. The note continues: “For those interested in the broader U.S. stock market, our forecast for the Wilshire 5000 is a bit worse, at -2.0%, due to the fact that small cap valuations are even more elevated than those for large caps”.

Inker adds: ” The basic point for us remains the same – the U.S. stock market is trading at levels that do not seem capable of supporting the type of returns that investors have gotten used to receiving from equities.

“Our additional work does nothing but confirm our prior beliefs about the current attractiveness – or rather lack of
attractiveness – of the U.S. stock market.”

In the second chapter of the update, Jeremy Grantham slates the “laughable” efficient market hypothesis and its former disciples Alan Greenspan, Ben Bernanke and the expected new Fed Chair Janet Yellen. He also suggests that the Nobel prize for economics is handed out every three years, given the dubious contribution of economics in the last few years and the lack of quality recipients or as he says, Real McCoys.

20131119 Breaking News! U.S. Equity Market Overvalued and Ignoble Prizes and Appointments

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