Why do we listen to stock market forecasts?
Because we can. Forecast, that is. Anyone can do it.
The experts are wrong as often as they are right, studies show. And who remembers what someone said about the market six months or a year back?
Still, we listen, especially when an investor of Bill Gross's stature speaks. The Pimco head bond guru stands out for both his investing skill and his attention-grabbing market letters. To be sure, his investing record is among the best. But his big calls on the market are peppered with some big-time misses.
In the latest Big Call, he did not so much make a forecast as serve a death notice on the market, writing in his monthly investment outlook that "the cult of equity is dead" and likening equities to "a Ponzi scheme."
Gross, of course, is a bond guy, and for that reason alone, some people dismissed his August advisory. Indeed, it's been a solid month for stocks, and there is no consensus that the market is showing signs of any big moves either way based on valuations and technical factors.
"The truth is that, as usual, nobody has a clue where the market or the economy is going," says Hugh Johnson, chief executive of Hugh Johnson Advisors. "But that doesn't stop us from forecasting."
For fund managers and analysts, it's all about getting noticed. So bolder is better. If you can be right about the future, all the better. But it's not a requirement.
Because Gross is so well-known, even his tamest forecasts get picked up by the media. This one sent news wires and financial television into full spin, with Gross tweeting suggestions that there has been a deep culture change in the population of investors now coming of age.
"Boomers can't take risk. Gen X and Y believe in Facebook but not its stock. Gen Z has no money," Gross said.
But in this case, it was the colorful language, not the message, that was bold.
The Gross forecast. His key point was that investment returns going forward will not match the past. That would not surprise anyone, since returns on most investments are at historic lows.
"Most forecasts are extrapolations," says Johnson. That is surely true of Gross's latest.
Gross's bottom line? "A presumed 2% return for bonds and an historically low percentage nominal return for stocks—call it 4%, when combined in a diversified portfolio produce a nominal return of 3% and an expected inflation adjusted return near zero. "
That does not sound quite as dire and prophetic as "death of equities." Indeed, few would argue that returns are going to be lower for many investments. Gross also won't get much argument on the other part of his note, that inflation will rise as governments pour cash into their economies to cope with slow growth and high debt, although it has not been seen so far. He kept underlining the word "nominal" because that figure is not adjusted for inflation, something that needs to be taken into account in deciding investments.
But Gross did go a step further, saying that the best-known proponent of long-term investing, University of Pennsylvania finance professor Jeremy Siegel, had things wrong in his seminal work on stock market's long-term potential. Gross argued that the stock market has been rising at 3 percent above the rate of economic growth, something which cannot be sustained.
"The Siegel constant of 6.6% real appreciation, therefore, is an historical freak, a mutation likely never to be seen again as far as we mortals are concerned," Gross said.
It's the kind of colorful, clever language that delivers an audience. Gross is effective at getting his message out—a Google search shows 40 million results for Bill Gross. Warren Buffett generates 6 million.
The record on forecasts. His record of beating benchmarks year after year with his main fund, Pimco Total Return, makes him quotable. But his crystal ball is no clearer than anyone else's. Birinyi Associates, the stocks research service, charted his calls over a decade and found a few hits and some big misses.
He made a series of negative forecasts in 2003 and 2004 saying stocks were overvalued by 20 percent to 25 percent, Birinyi notes. Stock prices nearly doubled the next two years.
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.