Bill Gross is out and about proclaiming the death of equities (more detail here; others have mined this ground already, as I pointed out back in May). In sum, Gross wonders how stocks can keep appreciating at a 6.6% annual rate (as they have, after inflation, since 1912) in this “new normal” economy, in which GDP growth remains stubbornly low. Putting aside the fact that we have the world’s most prominent bond investor dumping on his lead product’s chief competition for assets, what should we make of what he says?
My view is that Gross is a harbinger (but not an indicator) of the next secular bull market.
As I keep arguing, since 2000 we have been suffering through a secular bear market, subject to extreme cyclical swings in both directions. I hope that – as with the famous BusinessWeek cover – the current equities death watch is a leading bullish indicator or even the inflexion point to a new secular bull market. But I doubt it. Despite decent P/Es, other long-term valuation indicators (P/B, PE10, Q) as still too high. Even so, as my friend Tadas Viskanta sagely points out, “the seeds of a generational bottom or a new secular bull market are being sown. Unfortunately with these seeds we do not know how long it will take them to germinate.” In the meantime, investors would be wise to preserve capital by managing risk first while still looking for ways to invest profitably and well.
My bottom line: equity prices are still “too damn high” to get very excited long-term. Retail investors are leaving equities and have been doing so since 2007, as Jason Zweig points out and as illustrated right. But history suggests that we won’t see the shift to the next secular bull market until the market completely capitulates. My best guess is that we’re still a significant ways away from that. Besides prices that remain too high, the economy still needs further deleveraging, the “fiscal cliff” awaits, Europe looks far worse off to me than the markets imply (despite some decent arguments to buy it), ongoing domestic political gridlock appears inevitable and institutional investors have not yet given up the ghost.
I could be wrong, but I expect the current secular trend of volatile cyclical market moves in both directions to continue. Moreover, any strategy that makes a dramatic move away from equities runs a serious risk of underperformance, especially given current bond yields and the recent poor performance of hedge funds and other alternatives. I generally prefer hedged equity today (not to be confused with hedge funds as a class), for what it’s worth.
Some have suggested that the Gross pronouncement is a good reason to buy. For trading purposes that may be correct. But I don’t see it as a long-term buy signal. Bespoke noted yesterday that the famous 1979 BusinessWeek “death of equities” cover I referenced above was no buy signal either (a point I made back in May). That secular bear market continued into 1982. Claims like that made by Gross have been made before during this secular bear and will likely be made again before it’s over. Harbinger? Sure. But I suspect that the pain will be much greater before this market capitulates and lots of other people will suggest that equities are dead.
There are plenty of reasons to fear equities generally during a secular bear market, but this one will end. Equities are not dead. American innovation is not dead. We are 12 years in and secular bear markets average about 17 years in length. Given how much more swiftly markets move today, this market may well fail to last 17 years. But are the Gross comments a signal to load the boat? I don’t think so. Not yet. I want equities really to be dead (at least mostly dead?) before I do that.