Wharton School of Business economist Jeremy Siegel says that Bill Gross, Pimco’s co-chief investment officer, is dead wrong about stocks being dead.
Gross wrote in his monthly investment outlook on his firm’s website, “The cult of equity is dying. 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.”
He added that the so-called Siegel Constant, which states inflation-adjusted returns from equities to be 6.6 percent per year since 1912, is a “historical freak, a mutation likely never to be seen again as far as we mortals are concerned.” In a diversified portfolio, a presumed 2 percent return for bonds and a presumed 4 percent nominal return for equities would produce a nominal return of 3 percent and an inflation-adjusted return near 0 percent, Gross stated.
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“I will grant that the last 10 to 12 years have been poor years,” Siegel told CNBC. “We started from the most overvalued market that we had in the last century and we’ve gone to not the most undervalued one, but a market is valued lower than the long-run average.”
Gross criticized Siegel’s opinion that stocks have averaged a 6.6 percent annual gain during the past century, calling it little more than a “Ponzi scheme” and saying that stock markets can’t outpace economic growth.
Siegel insists that investors “definitely can have a return greater than gross domestic product growth, there is nothing un-economic about it.”
In answering Gross’s argument that such returns are “skimming off the top” of actual economic activity, Siegel said, “Capital has to give you a return above growth. Even in a no-growth economy you’re going to get some growth on capital.
“So it’s not an anomaly, it’s not inconsistent to get that phenomenon.”
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