Herd mentality leaving investors blind to value

In his latest commentary, GMO’s Jeremy Grantham warned investors that we could be entering a “market melt-up” phase of the current bull run which, according to many, is looking rather long in the tooth.

Herd mentality leaving investors blind to value

He predicted that, as with previous market sell-offs such as the ’90s tech boom and the ’08 financial crisis, the price of US stocks will rise exponentially before the bubble bursts and valuations then nosedive.

In fact, he believes there is at least a 50% chance of a “melt-up” over the next six months to two years and, if this happens, there is a further 90% chance stock markets could have at least half of their value wiped out.

‘Fomo’ driving markets

I can see the rationale behind his thoughts. There is an abundance of research available which suggests that, as investors fixate on bullish narratives late in the cycle, such as the current solid global GDP numbers and the impending US corporate tax cut, they experience a feeling of Fomo or ‘fear of missing out’.

That’s to say, they carry on buying into already-expensive equity markets and, while this may appear logical at the time, is nothing more than the result of herd mentality. It only takes a quick online search to see that long-term investors – even those who are nervous on today’s toppy valuations – believe everything will be fine so long as good stocks are bought and held onto.

However, this reasoning ignores today’s pricing and whether it presents itself as an attractive opportunity or not. We are worried that today’s investors are overlooking valuations in favour of the late-cycle bullish narrative and are ignoring the fact they are less likely to make money when they buy into expensive assets.

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