{"id":84,"date":"2012-08-03T16:16:21","date_gmt":"2012-08-03T16:16:21","guid":{"rendered":"http:\/\/www.wallstreetandkstreet.com\/?p=84"},"modified":"2012-08-22T18:48:31","modified_gmt":"2012-08-22T18:48:31","slug":"another-contrarian-equity-buy-signal-from-bill-gross","status":"publish","type":"post","link":"https:\/\/www.wallstreetandkstreet.com\/?p=84","title":{"rendered":"Another Stock Market Buy Signal from Bill Gross?"},"content":{"rendered":"

Recently Bill Gross, the brilliant \u201cbond king\u201d who\u00a0 founded Pimco, published a market commentary which The Wall Street Journal<\/strong> summarized with the headline:<\/p>\n

Bill Gross:\u00a0 Stocks Are Dead and Operate Like a \u2018Ponzi Scheme\u2019<\/strong><\/p>\n

It sounds ominous, but it could be bullish.\u00a0 Judging from published reports, the timing of Mr. Gross\u2019s bearish stock market calls has been less than perfect.\u00a0 A \u00a0CNNMoney article dated Sept. 6, 2002 carried this headline:<\/p>\n

Gross predicts Dow 5,000.\u00a0 Influential Pimco bond manager sees stocks moving lower before recovery begins.<\/strong><\/p>\n

CNN reported that Gross expected stocks to fall another 40%.\u00a0 In fact stocks troughed in September 2002 and rose 22% over the next year, 37% over the next two years, and 87% over the next five years.<\/p>\n

Deconstructing the \u201cCult of Equities\u201d<\/strong><\/p>\n

Nevertheless, Gross\u2019 recent commentary spotlights an issue that merits close attention.\u00a0 He argues that baby boomers became unduly infatuated with stocks.\u00a0\u00a0 They<\/p>\n

“. . . grew wealthier believing that pieces of paper representing ‘shares’ of future profits were something more than a conditional IOU that came with risk.\u00a0 Had not history confirmed it?\u00a0 Jeremy Siegel\u2019s rather ill-timed book affirming the equity cult, published in the late 1990s, allowed for brief cyclical bear markets, but showered scorn on any heretic willing to question the inevitability of a decade-long period of upside stock market performance compared to the alternatives.”<\/p>\n

Mr. Gross is being a bit unfair to Prof. Siegel of the Wharton School, who published Stocks for the Long Run<\/strong> not \u201cin the late 1990s\u201d near the top of the bull market, but rather in 1994.\u00a0 The latest data points in the book are for 1992, when stocks were languishing during an anemic \u201cjobless recovery.\u201d<\/p>\n

Gross\u2019 claim that the equity cult only \u201callowed for brief cyclical bear markets\u201d is also questionable.\u00a0 It is well known that stock prices \u201cwent nowhere\u201d in the 1930s and 1940s, and again in the 1970s. Indeed, Siegel wrote \u201cStocks have what economists call mean-reverting returns, meaning that over long periods of time, high returns seem to be followed by periods of low returns and vice versa.\u201d\u00a0 This is particularly relevant today, because if Siegel is correct then stocks, following poor returns from 2000 to 2012, should be about to enter an extended period of strong performance.<\/p>\n

Ponzi Scheme?<\/strong><\/p>\n

The clever title of Gross\u2019 piece, \u201cCult Figure,\u201d refers to 6.6%.\u00a0 This is what Jeremy Siegel determined, after exhaustive historical research going back to 1802, to be the \u201cnormal\u201d and surprisingly consistent long-term real total return from equities.\u00a0 Let\u2019s unpack this figure, because the details matter:<\/p>\n