Gauging the 'Bill Gross Effect' for Stocks

How much attention should you pay to gloomy market forecasts?

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Gross came on board with the stock market bulls in August 2008 to say "I don't think they are overvalued … stocks are basking in a growth revival," Birinyi said. The next eight months were among the worst in stock market history.

Even with bonds, where Gross made his name, he has had stumbles. His fund is still recovering from the wrong call of 2011 when he shorted bonds (i.e., bet heavily on rising treasury interest rates) and the market went sharply the other way. His fund fell to the bottom 2 percent of bond funds. To his credit, he's called his own move "a stinker."

The view from the market. The market barely paused to consider his "death of equities" note so far this month, enjoying a summer rally that recently carried the Dow to the highest level since March.

How stocks react to forecasts has much to do with the prevailing market sentiment. Stocks fell in the March-to-June period on sluggish economic growth and were ready for a recovery rally on talk of Federal Reserve credit easing. Investors have had little time for Gross's comment.

Still, that's not to say that influential analysts can't affect the market in a big way. By comparison, when banking analyst Meredith Whitney made a much-publicized prediction that municipal bonds would encounter billions in defaults in 2011, it led to a stampede out of those markets that lasted for months. At the time, credit fears were mounting over the federal budget showdown and there was concern over the looming failure of Harrisburg, Pa., and other municipalities in crisis. But Whitney's dire forecast proved wrong and the muni market began a year-long rally that continued through this summer. 

Gross was certainly right about one thing—his tweet that baby boomers don't want risk is true, and proven. Investors have withdrawn $200 billion from equity funds in recent years, according to ICI, and much of that has gone to bond portions of boomer's portfolios.

That's produced a mixed result for bondholders. Bonds have performed well until now, with interest rates falling and bond values rising. But with rates pinched to all-time lows, returns will also be limited. Investing in stocks in March 2009 would have helped investors recoup nearly all of their losses from the 2008-2009 crash.

There are few raging bulls now proclaiming the next big era for stocks. But many say a modest recovery is possible in the near term. The longer view is fuzzy.

The Gross view is that rising inflation will make for a bleak market. But at times, stocks have managed well with inflationary pressures as companies boost earnings and dividends to keep pace. 

And, of course, there are big-name stock-watchers taking the opposite position. For now, BlackRock's Bob Doll, another much-followed market forecaster who officially retired in June, has a view that is less colorful than Gross's but more focused on the present market realities. Earnings are looking flaccid, he said, and that might keep stocks from running a lot higher.

"The positives of easy monetary policy around the world, modest growth and a still-high equity risk premium should outweigh the negatives. Volatility is likely to remain high and equities may be poised for some sort of correction given their multi-week climb, but we expect stocks to continue to grind higher in the months ahead," Doll wrote in an investing commentary this week.

But remember: This is just a forecast—good for talking, but not for spending.