Jeremy Grantham of GMO says this is “no market for young men”. Maybe now I am over 50 it is my time! Yet my forecast of the S&P bottoming at 400 is still met with utter derision. I have been underweight global equities since the end of 1996 and overweight government bonds. Meanwhile US 10y bond yields have fallen from 7% to 1¾%, a hair’s breadth from our longstanding 1½% target. Similarly, in my very humble opinion, S&P at 400 is almost inevitable.
Those who do not believe this can happen are still choosing to ignore the reality that has unfolded before their eyes since 2000. In phase 3 of the Ice Age we would apply a 7-8x forward multiple to recession-depressed forward earnings of say $70-75/sh. That gets us pretty close our 400 S&P target. Unbelievable and ridiculous? They said that about our 1½% US T-Note forecast this time last year!
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The rout over the last couple of months in European equities may have been a lot worse than the US, but it has merely taken us back to the forward PE seen at the markets’ nadir in March 2009 – albeit lower at 7½x v 10½x on the S&P. But add in the recessionary impact on profits which have already begun to decline and European equity prices might fall a lot further yet, producing probably the buying opportunity of a generation.
