Bill Gross Is Latest to Join 'Stocks Are Dead' Club
Stocks will no longer generate the kinds of returns they've had over the past century, ending the "cult of equity" that has been Wall Street's mantra for generations, Bill Gross, managing director at bond giant Pimco, says in his monthly market analysis.
He also predicts the stock market's consistent annual return will be reduced to a "historical freak" that will never be repeated.
A global economic slowdown will lay waste to the pattern, consistent since 1912, of the market averaging 6.6 percent annual returns, says Gross, who helps run the Pimco Total Return Fund, the world's largest bond fund at $263 billion.
Thus will fade the "cult of equity" espoused by Wharton professor Jeremy Siegeland his disciples who believe, with the exception of brief bear markets, that stocks are the most consistent game in town, Gross says.
"The cult of equity is dying," he writes. "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 is the latest high-profile industry name to pronounce the stock market moribund if not completely dead.
David Rosenberg, the economist and strategist at Gluskin Sheff, used almost identical language to Gross in declaring Monday that the "equity cult is nearly over."
Morgan Stanley chief market strategist Adam Parker, who sees the market falling 12 percent by the end of year, said the only reason to buy stocks now is in anticipation that Republican Mitt Romney will win the presidential electionin November.
Though strategists at larger investment houses such as Bank of America Merrill Lynch and JPMorgan remain bullish on stocks, investors have taken a dimmer view. They pulled $9.4 billion out of stock-based mutual funds last week alone and poured money at near-record numbers into high-yield bonds.
For his part, Gross argues that the return of stocks above the rate of economic growth as measured by gross domestic productcannot be sustained.
"The 6.6 percent real return belied a commonsensical flaw much like that of a chain letter or yes — a Ponzi scheme," he says. "If wealth or real GDP was only being created at an annual rate of 3.5 percent over the same period of time, then somehow stockholders must be skimming 3 percent off the top each and every year.
"If an economy’s GDP could only provide 3.5 percent 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)?"
Siegel himself, in an interview on CNBC's "Street Signs" program, faulted Gross' logic that stock returns can't exceed GDP growth.
"Capital has to give you a return above growth. Even in a no-growth economy you're going to get some growth on capital," he said. "So it's not an anomaly, it's not inconsistent to get that phenomenon."
He also acknowledged that the market has been flat for the last 12 years but said that doesn't cancel out the long-term performance.
"I will grant that the last 10-12 years have been poor years," Siegel said. "We started from the most overvalued market that we had in the last century and we've gone to not the most undervalued one but a market is valued lower than the long-run average."
But Gross says that the dawn of what the firm has coined the "New Normal" — a prolonged slow-growth period — will thwart gains for both stocks and bonds.
"Together then, a presumed 2 percent return for bonds and an historically low percentage nominal return for stocks — call it 4 percent, when combined in a diversified portfolio produce a nominal return of 3 percent and an expected inflation adjusted return near zero," he says. "The Siegel constant of 6.6 percent real appreciation, therefore, is an historical freak, a mutation likely never to be seen again as far as we mortals are concerned."
The Gross prognostication comes as central bankers in the U.S. and Europe are expected to employ new techniques to spur growth and head off a burgeoning euro sovereign debt crisis. The Federal Reserve begins its two-day meeting Tuesday.
What they may come up with, he speculates, is a concerted policy to continue to inflate asset prices to placate investors.
"Woe to the holder of long-term bonds in the process!" he says. "Similarly for stocks because they fare poorly as well in inflationary periods."
Future rounds of quantitative easingand other measures are expected to take place around the world to address New Normal slowness.
"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," Gross says. "The cult of equity may be dying, but the cult of inflation may only have just begun."
TUNE IN: Bill Gross will appear live on CNBC's Street Signs at 2pm ET, Wednesday, August 1
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