Be afraid. Be very afraid.
So said investing luminaries Bill Gross, manager of the Janus Henderson Global Unconstrained Bond Fund, and Paul Singer, founder of hedge fund Elliott Management Corp., at the Bloomberg Invest New York summit on Wednesday.
You’ve no doubt heard the gist of their argument a thousand times: The Federal Reserve flooded the U.S. economy with cheap money after the 2008 financial crisis by holding interest rates near zero and beefing up its balance sheet. Corporations and individuals responded by bingeing on debt and risk assets -- as the Fed all but dared them to do.
The mere mention of leverage and inflated asset prices in the same sentence is enough to startle anyone who lived through the financial crisis. The clear implication of Gross and Singer’s warning is that another market crash is imminent.
They may be right, but their prognostication sounds more like wishful thinking than objective analysis.
Gross's and Singer’s investment realms -- high-grade bonds and multistrategy hedge funds, respectively -- have been two the biggest laggards since the financial crisis. The S&P 500 has returned 18 percent annually from March 2009 through May, including dividends. By contrast, the HFRI Fund Weighted Composite Index -- a collection of various hedge fund strategies -- has returned 6.2 percent annually, and the Bloomberg Barclays U.S. Aggregate Bond Index has returned 4.2 percent annually.
Not even ace investors like Gross and Singer could overcome those headwinds. Gross has beaten the Aggregate Bond Index by 1 percentage point annually from March 2009 through May, first with the Pimco Total Return Bond Fund and now with the Janus Henderson fund based on returns for institutional share classes. And yet Gross has trailed the S&P 500 by a staggering 12.8 percentage points annually.
Singer couldn’t keep up, either. Elliott Associates has returned roughly 13.5 percent annually since its inception in 1977, but recent returns have been lower. Elliott’s full performance history isn’t publicly available, but based on annual returns provided by Elliott, the fund returned 11.2 percent annually from 2009 to 2016, while the S&P 500 returned 14.5 percent annually.
But everything is likely to be different if Gross and Singer’s doomsday scenario plays out. Consider that while the S&P 500 gave up 50.9 percent from November 2007 to February 2009, the HFRI Index was down only 21.4 percent and the Aggregate Bond Index was up 6.1 percent.
Gross did even better. His Pimco fund returned 7.5 percent from November 2007 to February 2009. Singer outpaced his peers, too. Elliott Associates was down only 3.1 percent in 2008.
In other words, a market meltdown is likely the best thing that could happen to Gross and Singer.
I have concerns about the lofty levels of U.S. stocks, too (here, here, here, here, here and here). But Gross and Singer must also acknowledge that rich valuations don’t necessarily mean that a market collapse is inevitable.
The market could instead hang around its current level for years, waiting for earnings to catch up with stock prices. As my Gadfly colleague Stephen Gandel recently pointed out, there are credible reasons why the big corporations that dominate the S&P 500 could remain highly profitable for the foreseeable future -- the most compelling of which is that big corporations are bigger and more powerful today than they’ve been in generations. And while those companies remain profitable, it’s hard to imagine a market meltdown.
It’s worth pointing out that in either case -- whether stock prices tumble or just hang around -- returns from stocks would be muted for years, which would give Gross and Singer an opening to outpace stocks going forward. But without a sharp market decline, they’re unlikely to recreate the spectacular outperformance achieved during the financial crisis -- and collect the accolades and asset flows that go along with it.
Gross and Singer are entitled to dream, but the glory they envision is far from inevitable.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Nir Kaissar is a Bloomberg Gadfly columnist covering the markets. He is the founder of Unison Advisors, an asset management firm. He has worked as a lawyer at Sullivan & Cromwell and a consultant at Ernst & Young.
© Copyright 2023 Bloomberg L.P. All Rights Reserved.