I’m not sure how I’d feel about inviting Jeremy Grantham to my Thanksgiving dinner.
On the one hand, I could see him being a font of fascinating cocktail chatter. After more than a half-century of navigating the markets, the man no doubt has stories to tell, and in a sophisticated English accent at that!
But on the other hand, at the first mention of U.S. stocks, I could see him being a real wet blanket. His forecast for the next seven years isn’t exactly rosy.
If case you’re not familiar with him, Grantham is the co-founder of Grantham, Mayo, & van Otterloo (GMO), a Boston-based money manager with about $60 billion under management. He’s one of the best in the business, and he successfully called the last two market bubbles in 2000 and 2008, even though he took a lot of flak for it both times.
Grantham’s firm regularly publishes a seven-year forecast for the returns of various asset classes. While it’s not gospel truth, it’s proven to be pretty accurate over the years.
But Why Seven-Year Forecasts?
Grantham’s learned that seven years is roughly how long it takes for profits and stock prices to revert to their long-term averages.
In any single year, guessing the direction of the market is a crapshoot. And over the long term, stocks have historically returned about 7% per year after inflation.
But seven years is that sweet spot where Grantham’s mean reversion models add value.
So, let’s see what Grantham & Co. see going forward:
There’s a lot of red on the chart.
Based on GMO’s mean reversion models, U.S. large-cap stocks are priced to lose 3.9% per year over the next seven years. U.S. small-caps are priced to lose 1%.
Essentially, Grantham is forecasting a major bear market in the coming years and what is likely to be a slow recovery.
Overseas, the story isn’t quite so bad… but it’s not exactly stellar.
Developed international stocks are projected to essentially go sideways over the next seven years.
Even bonds look nasty…
U.S. bonds are projected to lose 2.2% per year over the next seven years, and developed international bonds (i.e. Europe, Canada, Australia, and Japan) are projected to lose 3.9% per year in dollar terms.
If there’s one bright spot, it’s in emerging markets.
Emerging markets have been beaten and left for dead over the past decade. As a case in point, the iShares MSCI Emerging Markets ETF (NYSE: EEM) is still sitting at prices first reached in 2007.
In a 12-year period that has seen the S&P 500 rise nearly 120% even after taking the 2008 meltdown into account, emerging markets have gone nowhere.
Now, I agree with Grantham that emerging markets look like an attractive place to park some of your savings over the next seven years or so. I plan to seek out opportunities in that space.
But you can’t put your entire portfolio in emerging market stocks. That would be madness.
After all, emerging markets started 2018 attractively priced and yet still managed to drop 20% in the nearly two years that have passed.
So, Where Do You Put Your Money?
You can, however, take a more active approach to investing and expand beyond the S&P 500.
Buy-and-hold investing works over the long-term. I believe that. And history has proven it.
But the “long-term” can sometimes be a lot longer than you’re willing to wait…
The S&P 500 went nowhere between 1968 and 1982, leaving investors to tread water for 14 long years.
More recently, the S&P 500 went nowhere between 2000 and 2013, again making buy-and-hold a tough proposition.
None of this means that another 13- to 14-year drought starts today. But if you’re in or approaching retirement, you really shouldn’t take that risk.
Capital gains might be hard to come by over the better part of the next decade. If you focus on current income, you don’t necessarily need outsized capital gains.
In my Peak Income newsletter, my readers enjoy an entire portfolio of high-yielding stocks. Most of which offer payouts of around 5% to 10% per year.
These aren’t necessarily stodgy, no-growth investment either.
We have several positions that have enjoyed total returns of over 20% over the past year.
In a market priced to deliver lousy returns, that’s not too shabby.