Boring Fair Price!

by Jeremy Grantham

Waiting for Markets to be Silly Again
A year is certainly a long time in markets, and so is a quarter. A year ago, equities globally – and everything else for that matter – were very overpriced, particularly if they were risky. A quarter ago, in mid March, prices everywhere were cheap. Now they have all – or almost all – converged for a few unusual moments at fair value. A year ago, it was very easy to know what to be: a risk avoider. It was not so easy reinvesting when terrified, but most of us knew that we should have been doing more. But today? It’s difficult to be inspired at fair value. Since early March, the market has had the type of strong speculative rally that often follows extreme declines. The danger of a breathtaking rally is that it leaves those few investors who raised considerable cash waiting for a pullback and psychologically invested in the case for a new bear market leg. This was covered in our mid-March posting, “Reinvesting When Terrified.” That theme was developed a few weeks later for me when the penny dropped: the extreme stimulus and moral hazard of recent quarters resembled the stimulative third year of a Presidential Cycle. Indeed, it seems to have turned this usually restrictive Year One into a giant Year Three effect.

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