First, let’s just get it out there, lumber grades are kind of from a bygone era, and don’t have as much relevance as once was the case. Of course there will always be areas such as, e.g., long runs of molding, high-end veneer, period furniture, etc where the market still demands perfection.
These days, there are entire market segments where characteristics that lumber graders are required to call “defects” actually raise the price of wood — knotty pine, knotty alder, reclaimed woods of all stripes, live edge (this has been the flavor of the month for years now), etc.
Certainly there are all kinds of pros serving very different market niches, so every type of response to your question is possible. These days, accentuating the so-called defects is very much in vogue, and it gets called “character wood”. This may have started back with George Nakashima and his classic “Arlyn” table, which was a wild mess of redwood:
There’s also a huge market for taking even incomplete pieces of “character” wood and setting them in a bath of epoxy, letting the entire thing cure, and then using the epoxy chunk with wood bits trapped inside as if it were a piece of lumber. So-called “epoxy river” tables and the like, I’m sure you’ve seen them.
Also, any sort of defective wood can simply be labeled as “rustic” and used in a different context than has traditionally been seen. One might say this opens up more opportunities for creativity because a broader range of options exists in todays marketplace.
So I don’t know if there is a sweet spot per se, it’s up to the individual and even can vary based on the mood of the individual. You might make a perfect Morris chair in flawless quartersawn oak one day and a rustic country cupboard using knotty pine the next, right?