The Day After the Day After Tomorrow

There are very few market commentators whose words I parse as closely and respectfully as GMO's Jeremy Grantham. Besides being the featured interviewee in this past week's edition of Barron's, his quarterly letter was just posted. He succinctly lays out his own golden rules for successful investing in the years ahead and discusses the current valuations assigned to various investment categories used by his asset allocation group. On all counts I concur with his views.

Not surprisingly, GMO currently assigns very poor expected returns for fixed income securities, especially long-term US government bonds, in the years ahead. Based on the historical precedence of equities to perform well in most environments over longer-term time horizons, especially in periods of rising inflation, GMO favors equities to bonds. It sees most of the global equity markets as fairly valued, with the exception of US stocks ex-high quality, which they deemed very overvalued. Below is an illustration of the recent performance of the equal-weighted S&P 500 ETF (RSP) to the iShares S&P 500 Value Fund (IVE) since the market peak in 2007....480 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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