Jeremy Grantham’s thoughts on today’s markets

Jeremy Grantham and his team released the latest GMO quarterly letter a couple of weeks ago. In an article entitled “The virus, the economy and the market” he starts by noting the predictability (and predicted) of previous crises, from the Japanese property and equity bubble of the late 1980s, the Tech Bubble of the late 1990s to the US housing euphoria bubble of 2007.
But the Covid-19 event is unlike all of these. It is new; there are no certainties, only “strong possibilities”.
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Grantham says that the market response has been bizarre. It has led us to the point where the price earnings ratio (using the average of the last ten year’s earnings) for the S&P falls into the top 10% of all time. In fact, the cyclically adjusted price earnings ratio for US shares at 29.9 is as high as it was in 1929 and the late 1990s - see chart from Professor Robert Shiller below. The other boom years do not come close, except 1901 and 1966.
Simultaneously we are facing one of the worst 10% of economic situations, “arguably even the worst 1%!”.   2020 is not a boom year in economic terms.


The virus is causing supply and demand shocks more dramatic than anything that has come before, “ever”.
And this is global, unlike in 1989 Japan, 2000 Tech and 2008 (US and Europe).
The best hope is for a vaccine to turn up within months, and in billions of doses. But we know,
(a) that for most viruses a useful vaccine is never found,
(b) most vaccines take over five years to develop, and even then, are only partially successful.
IF a vaccine is found quickly there will still be “deep economic wounds” – lowered profitability; bankruptcies; unemployment.
In Grantham’s 82 years he has never been through a period when the future is so uncertain. At the same time, we have a US stock market barely below where it was in January when everything “seemed fine in economics and finance. And if not ‘fine’, well, good enough”.
In terms of “risk and return - particularly of the worst possible
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