The Bond King Says Stocks are Dead
Bill Gross of Pimco is basically stating that the inflation adjusted returns in the stock market in the last century of 6.6% are over. I understand that this was news almost a month ago, but it is still worth pondering. The following article is from the WSJ. By the way, it is worth reading the original Pimco Investment Outlook, which can be found at Pimco.
Bill Gross, Pimco’s co-founder and co-chief investment officer, says stock investors should think again about the age-old “buy-and-hold” investing mantra. He says consistent, annual returns are a thing of the past.
“The cult of equity is dying,” “Like a once bright green aspen turning to subtle shades of yellow then red in the Colorado fall, investors’ impressions of ‘stocks for the long run’ or any run have mellowed as well.”
Gross points out stocks have averaged a 6.6% annual gain on an inflation-adjusted basis since 1912. But he labels that rate of return as an “historical freak” that isn’t likely to be duplicated anytime soon, due to slowing economic growth around the globe. From Gross:
“The 6.6% real return belied a commonsensical flaw much like that of a chain letter or yes — a Ponzi scheme. If wealth or real GDP was only being created at an annual rate of 3.5% over the same period of time, then somehow stockholders must be skimming 3% off the top each and every year. If an economy’s GDP could only provide 3.5% more goods and services per year, then how could one segment (stockholders) so consistently profit at the expense of the others (lenders, laborers and government)?”
Gross wonders how stocks can keep appreciating at a 6.6% annual rate in this “new normal” economy, in which GDP growth remains stubbornly low.
U.S. second-quarter GDP, reported on Friday, grew at a meager 1.5% rate. That growth rate is well below historical standards, and is partly why the unemployment rate remains stuck above 8%.
“The legitimate question that market analysts, government forecasters and pension consultants should answer is how that 6.6% real return can possibly be duplicated in the future given today’s initial conditions which historically have never been more favorable for corporate profits,” Gross says. He says it cannot, “absent a productivity miracle that resembles Apple’s wizardry.”
In addition to being pessimistic on stocks, Gross is also down on bonds. “What you see is what you get more often than not in the bond market, so momentum-following investors are bound to be disappointed if they look to the bond market’s past 30-year history for future salvation, instead of mere survival at the current level of interest rates,” Gross says.
With lower expected returns for stocks and bonds, the average American is the big loser in this new investing environment.
“The commonsensical conclusion is clear: If financial assets no longer work for you at a rate far and above the rate of true wealth creation, then you must work longer for your money, suffer a haircut on your existing holdings and entitlements, or both,” Gross says.
Investors looking for a “magic potion” that will solve the world’s problems shouldn’t hold their breath. Policy makers in the past have tried to “inflate their way out of the corner,” he says. . . . .
“Unfair though it may be, an investor should continue to expect an attempted inflationary solution in almost all developed economies over the next few years and even decades,” Gross says. “Financial repression, QEs of all sorts and sizes, and even negative nominal interest rates now experienced in Switzerland and five other Euroland countries may dominate the timescape.
“The cult of equity may be dying, but the cult of inflation may only have just begun.”