The Standard & Poor’s 500 Index will have negative inflation-adjusted returns during the next seven years because U.S. stocks are so overvalued, said Ben Inker, head of global asset allocation at investment firm Grantham Mayo Van Otterloo & Co.

“The U.S. stock market is trading at levels that do not seem capable of supporting the type of returns that investors have gotten used to receiving from equities,” Inker wrote in quarterly letter released yesterday. Stock values “will be resolved either through a relatively quick bear market or a longer period of more of less flat returns.”

Jeremy Grantham, chief investment strategist for the Boston-based firm that oversaw $112 billion as of Sept. 30, wrote in the same letter that prudent investors should already be reducing their equity bets and their risk level in general. “Be risky and you’ll probably make some more money, but you may be bushwhacked and, if you are, your excuses will look thin,” he said.

Stocks have been pushed to record highs in three rounds of assets purchase by the Federal Reserve, which have forced investors into risk assets such as equities. The Dow Jones Industrial Average exceeded 16,000 for the first time yesterday and gained 22% this year, and the S&P 500 Index climbed 26%.


BlackRock Chief Executive Officer Laurence D. Fink said this month that stocks may decline as much as 15% because of political risks in China, Japan, France and the U.S. New York-based BlackRock is the world’s largest money manager, with $4.1 trillion in assets.

Grantham, 75, is best known for his prediction in 2000 that stocks would lose ground in the next decade. The benchmark index lost 1% a year in the 10 years ended Dec. 31, 2009, according to data compiled by Bloomberg.

Inker said the fair value of the S&P 500 Index is 1,100. The index closed yesterday at 1,791.53. He said the expected return on the index over the next seven years was a loss of 1.3% annually after adjusting for inflation. For the broader Wilshire 5000, he predicted an adjusted annualized loss of 2%.



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