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Gross: Risk Asset Rally is Almost Over

By Dan Weil   |   Wednesday, 28 Oct 2009 09:39 AM

Bond fund guru Bill Gross says that the recent rally in riskier assets is just about over.

Gross, managing director at Pimco, argues on the firm’s Web site that there’s a new normal for investment returns, just like for economic growth.

He and Pimco colleague Mohamed El-Erian have argued that, thanks to the aftermath of the financial crisis, GDP won’t grow more than 1 to 2 percent in coming years.

Looking at the average of investment-grade bonds — Treasuries, mortgages and corporates — the current yield is only 3.5 percent, Gross explains.

“To get more than that, high yield, distressed mortgages, and stocks beckon the investor increasingly beguiled by hopes of a V-shaped recovery and ‘old normal’ market standards,” he says.

“Not likely, and the risks outweigh the rewards at this point. Investors must recognize that if assets appreciate with nominal GDP, a 4 to 5 percent return is about all they can expect even with abnormally low policy rates.”

That means the recent gains will peter out quickly, Gross maintains.

“Rage, rage against this conclusion if you wish, but the six-month rally in risk assets — while still continuously supported by Fed and Treasury policymakers — is likely at its pinnacle. Out, out, brief candle.”

Others also think the rally will soon run out of steam.

Money manager Steve Leuthold sees stocks gaining for the next few months and then slipping back.

“Undoubtedly the performance in 2009 will be better than 2010,” he told Bloomberg.

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Bond fund guru Bill Gross says that the recent rally in riskier assets is just about over.Gross, managing director at Pimco, argues on the firm’s Web site that there’s a new normal for investment returns, just like for economic growth. He and Pimco colleague Mohamed...
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