Grantham feels that speculative stocks will lead the stock market higher and the S&P could rise by 15%. Grantham comments that the large cap value stocks are undervalued while small speculative stocks are overpriced. However, that does not mean that he expects an imminent correction in speculative stocks. His reasoning is that the third year of the presidential cycle is often bullish for the stock market, most particularly smaller stocks.
Grantham's top holdings are still large cap value stocks such as JNJ, MSFT and KO, all of which underperformed the broader averages and emerging equities in 2010. It appears that Grantham is willing to be patient knowing that price will eventually match value.
The second major reason that Grantham is short term bullish is that he does not expect interest rates to rise any time soon. Grantham noted that it is a rare event in history for stocks to fall when the Federal Reserve has an easy monetary policy. Judging by Ben Bernanke's renewed commitment to QE2 it appears that rates will remain low as Bernanke feels unemployment is too high and inflation is too low.
It appears that Grantham has his eyes on the exits as he advised that investors should "be aware that you are living on borrowed time as a bull; on our data, the market is worth about 910 on the S&P 500, substantially less than current levels, and most risky components are even more overpriced." Thus, Grantham believes that the S&P is overpriced by almost 30%.
Grantham is more concerned with emerging markets where he believes that they are being buoyed by animal spirits, rather than sound fundamentals. "This is possibly the last chapter in a 12-year love affair. Emerging equities seem to be in the early stagesof the “Emerging, Emerging Bubble” that, 3½ years ago, I suggested would occur."
Jeremy Grantham's January 2011 Letter