Stocks have had a great 100 years. That time is over. Continue to invest in equities at your own peril.
All of these warnings come from bond king William H. Gross, co-founder and co-chief investment officer of Pimco, who writes in his August newsletter that people should no longer count on the strategy of investing in stocks for the long haul.
Gross’s central point is mathematical. For the past 100 years, since 1912, stocks have averaged 6.6% in annual gains, adjusted for inflation. That’s compared with annual average GDP growth that’s 3 percentage points lower. “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,” Gross writes.
Gross adds that if the stock market now gets its comeuppance, it would be particularly disastrous for pension funds, which require as much as 8% in asset appreciation to meet their obligations. And governments, to paper over some of the problems in the short term, may well turn to inflation. “The cult of equity may be dying, but the cult of inflation may only have just begun,” Gross concludes.
Many are attacking Gross’s analysis, noting that the death of stocks has been predicted before. And Peter Drucker knew better than most the folly of making such bold calls, having foolishly forecast an ever-rising stock market just before the crash of 1929. (We ourselves are highlighting Gross’s bearish pronouncements on a day that stocks reached three-month highs.)
Still, Drucker was always wary of any signs of froth in the market. “When you see that the trading volume isn’t people who buy shares or who sell shares, but traders buying and selling short term, then the market has gotten out of control,” he cautioned in Managing In the Next Society.
Drucker was also as grim as Gross on the matter of corporate retirement funds, which Drucker felt depend on “the firm belief” that a company’s own pension plan, “if only administered ‘professionally,’ would ‘beat’ even an ever-rising market.” But, as he pointed out in the Frontiers of Management, “There is, of course, no law that prescribes an ever-rising stock market.”
Finally, the very notion that money, if invested, is sure to grow at a decent rate was, in Drucker’s view, magical thinking. “A large pool of money which over any long period time grows at all, let alone as fast as the economy, is the rarest of all exceptions—neither the Medici nor the Fuggers, nor the Rothschilds nor the Morgans, succeeded in this endeavor,” Drucker wrote, in a passage that sounds not too dissimilar from Bill Gross’s newsletter.
What do you think: Is a high-performing stock market a thing of the past? Why or why not?