US Stocks Too Richly Valued For Their Risk | John Pease, GMO

We finally get an expert from Jeremy Grantham's firm on the channel!

Jeremy Grantham is one of the most respected investors alive today.

His firm - Grantham, Mayo, Van Otterloo & Co -- better known as GMO, manages $billions in assets under management and produces some of the most-followed market analysis on Wall Street.

Core to its outlook is that financial and economic extremes will mean revert. And that prudent investors can pro-actively position themselves to benefit greatly from this reversion when it takes place.

And while, no, I am NOT interviewing Mr Grantham today, we have the next best thing: the chance to sit down with one of his lieutenants at GMO.

John Pease is a quantitative researcher and partner at GMO, who co-authored the firm's latest Quarterly Letter, which I expect to discuss with him in depth.

We discuss GMO’s current view on the markets, the vulnerabilities of passive investing, and which sectors GMO is allocating to given its outlook.

For all that and more, click here or on the video below:

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Adam’s Notes: John Pease (recorded 8.12.24)

EXECUTIVE SUMMARY

• The U.S. economy has transitioned from an overheated state with tight labor markets to a slowdown, with labor supply now exceeding demand. This aligns with the Federal Reserve's goal to curb inflation through interest rate hikes.

• John believes investing in equities during a recession can be risky. Historically, investing during a recession leads to a loss of 1.5 percentage points per month, while investing during non-recession months generally yields positive returns. However, accurately predicting recessions is challenging.

• The rise of passive investing may have led to inefficiencies in the market, particularly in the relative pricing of asset classes and within specific equity sectors. However, the overall effect is difficult to quantify.

• While passive investing may have contributed to the rise of mega-cap stocks, their growth is primarily driven by their strong earnings performance. However, companies like Apple, which have struggled with revenue growth, benefit from large-scale buybacks, which further support their stock prices.

• The distortions caused by passive investing create opportunities for active investors, particularly those who focus on mean reversion and are willing to provide liquidity to inelastic passive flows.

• While there are concerns about a potential recession, especially if the Fed's actions overshot, the current increase in unemployment is primarily due to higher labor participation, not layoffs, which is less concerning. GMO remains cautious but sees value in certain market segments that may perform well regardless of the economic outlook.

• GMO is currently focused on investing in