Montreal, Canada

If you never heard of Jeremy Grantham then I suggest you become familiar with his views. The chief investment strategist at multi-billion investment firm GMO in Boston called the March 2009 market bottom and the market peak in 2007. Grantham is an astute market analyst and more often than not has predicted macro trends that usually turn out to be spot on.

In a Wall Street Journal commentary today (C14, Money & Investing) Grantham is advising caution and predicts stocks will correct sharply following a big rally off the lows last winter.

"Once again, the Fed is playing with Fire…I was counting on the Fed and the Administration to begin to get the point that low rates held too long promote asset bubbles, which are extremely dangerous to the economy and the financial system. Now, however, the penny is dropping and I realize the Fed is unwittingly willing to risk a third speculative phase, which is supremely dangerous this time because its arsenal now is almost empty."

Grantham claims fair value on the S&P 500 Index is 850 (currently at 1,092) and believes the market is currently "seriously overpriced." If he's right, the broader market is vulnerable to a 22% correction, typically defined as a bear market.

The Boston based contrarian strategist admits to reluctantly adding bonds at this stage of the stock market rally at the expense of equities – or what he coins his "distaste for parking the rest in unattractive fixed-income." Still, high quality bonds have fared well in almost every market dislocation since 1997; since January 1st the yield on the benchmark U.S. 10-year Treasury bond has declined from 3.84% to 3.63%; stocks are down 2%.

Grantham is also predicting that high quality U.S. large-cap stocks will outpace smaller companies in the next leg or market advance. GMO's forecast calls for high quality large-cap stocks to deliver 6.8% per annum over the next seven years compared to 4.7% per year for international stocks and 3.9% annually for emerging market equities.

Interestingly, though U.S. stocks have historically powered back with big gains following a decade of poor performance, Grantham doesn't believe the next ten years will necessarily be great for equities. The 2000s ranked as the worst-performing decade in more than 100 years – even worse than the 1930s.

"Going into this next decade, we start with the U.S. overpriced, so do not be conned into believing that every bad decade is followed by a good one," says Grantham.