Bill Gross: We’re Witnessing the Death of Equities

WSJ ^ | 07/31/12 | Steven Russolillo

[TigerLikesRooster]

July 31, 2012, 3:03 PM

Bill Gross: We’re Witnessing the Death of Equities

By Steven Russolillo

The bond king says stocks are dead.

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,” Bill Gross wrote in his August Investment Outlook. “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:

[avenir]

Instruct those who are rich in this present world not to be conceited or to fix their hope on the uncertainty of riches, but on God, who richly supplies us with all things to enjoy.—1 Tim 6:17

The "uncertainty of riches" lets you down in the end. Maybe you have to be really, really lousy with riches, like me, to find an oasis in this verse. But I think any of the worries we have in this world are swept aside with "but on God, who richly supplies". I need GOD, and HE is there for me (and you)!

[kearnyirish2]

“Equities aren’t dead any more than they where dead in 1929, but I believe the current bull market is based on a house of cards, namely, the Fed printing all that money and pumping into the system.”

One thing any investor can’t ignore is the fact that the income/returns are being skewed by unreported inflation. If $100 today will get me $200 in a year, but gasoline costs $15 per gallon at that point, I didn’t even beat inflation with my 100% return. I have limited knowledge of investing, but know enough about risk. What many investing professionals called “currency risk” (when investing in foreign investments) is no more dangerous than the inflation risk in domestic products.

I’d think the bond market is heading for its own problems, as mortgages become a thing of the past. People who have stopped breeding, who don’t know where they’ll be working three months down the road, see little reason to commit to a growing property tax bill in municipalities with little hope of meeting their retirees’ costs. What 25- to 30- year old American needs a house today?

[danielmryan]

There's an old saying in toxicology: "Everything is a poison; nothing is a poison - it all depends upon the dose."

For equities, it all depends upon the price. When the price is right, when stock-performance lassitude combined with still-growing earnings makes the discount steep enough to provide traction for a new long-term bull market, equities will come alive again.

That said, Gross is making his comments when the S&P is close to a four-year high. The averages have been in a very long term range since 2000. Unless anyone here has some good reason to expect kick-start growth in corporate profits, they should consider that 12-year range. Suffice it to say, the S&P looks toppy right now.

Sure, Gross' remarks are a lot like the Mathusian malaise talk that was last popular in the '70s. But if he were the stereotypical foot-in-mouth boy that some seem to think he is, he'd be bemoaning the stock market at the lower end of the 12-year range (like he did in '09.) In the shorter term, his timing may be pretty good. And, sad to say, the "new normal" phase is still in place - and may be for several more years. The last range-bound market lasted from '66 to '82: sixteen years.

[And we all know who got elected President in '80. Suffice it to say, his likesake ain't on the ticket in '12.]

[NVDave]

That seems to be the default mode of Wall Street. They talk one way, manage another.

I’ve been through this with a money manager. His columns in Forbes were a better reflection of what worked in the market than how he actually managed client money.

[bruinbirdman]

"“The cult of equity is dying,” Bill Gross wrote "

Gross expounded on this today on CNBC. He says that the adage of equities outperforming bonds over time no longer holds.

The stats Gross used on both sides are 100 year performances. But his time frame, now, and the comment above is for the next ten years.

yitbos

[bruinbirdman]

"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. "

yitbos

[familyop]

Thank you for clarifying with more context.