Toss your stock-investing assumptions, Bill Gross says
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Even though stock prices look cheap by some measures, investors should think twice before jumping in.
So says Bill Gross, noted bond guru at Pacific Investment Management Co. in Newport Beach.
Perhaps not surprisingly, Gross argues that it’s “better to own corporate bonds than corporate stocks.”
In his monthly investment commentary published today on Pimco’s website, Gross writes that key factors that propelled stocks higher in recent years -– including cheap financing, surging global growth, light regulation and unfettered risk-taking –- will be in short supply in the post-financial-crisis era.
The result is, he says, that corporate earnings will grow more slowly than in the recent past and stock prices will be sluggish.
“Stocks are cheap when valued within the context of a financed-based economy once dominated by leverage, cheap financing, and even lower corporate tax rates,” Gross writes. “That world, however, is in our past not our future. More regulation, lower leverage, higher taxes and a lack of entrepreneurial testosterone are what we must get used to.”
He continues:
Dow 5,000? We don’t have to go there if current domestic and global policies are focused on asset price support and eventual recapitalization of lending institutions. But 14,000 is a stretch as well.
Gross’ analysis hinges on the premise that everything is different now — that the changes triggered by the financial crisis will be not just noncyclical but also “transgenerational”:
We will not go back to what we have known and gotten used to. It’s like comparing Newton and Einstein: Both were right but their rules governed entirely different domains.
But lest investors take his stock-market prognostications as inevitable, Gross freely acknowledges that his record as an equity soothsayer leaves much to be desired.
Six years ago, he predicted that the Dow industrials would sink to 5,000 from 8,500 –- only to watch them skyrocket above 14,000 before the current bear market struck.
Gross jokes that he could have blamed his wrong-way forecast on any of a number of off-the-shelf excuses:
1) No one else saw it coming, 2) I was misinterpreted and taken out of context, 3) I was tired, overworked and had family problems, or 4) I had just come out of rehab.
“But these days what really works is a full confession,” Gross writes. “I mean, like, uh, it was totally my fault, and I take full responsibility. The fact is I was only off by 9,000 points.”
— Walter Hamilton