Stock & Bond Returns Will Be Below Normal for Years

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Published: Wednesday, 31 Mar 2010 | 10:09 AM ET
By: Jeff Cox
Investors should acclimate themselves to years of lower-than-normal returns in both stocks and bonds, Pimco’s Bill Gross told CNBC.

As part of the firm’s forecast of a “new normal” in the slow-growth economy, Gross, co-CIO at the largest bond management firm in the world, said returns probably will be half of the normal 8 percent or so annualized profits to which investors have become accustomed.

“We should expect less as opposed to more—new normal as opposed to old normal,” he said in an interview. “We should expect that the private economy is delivering on a global basis. That means consumption and household income growth will be less than it has in prior years.

“And that means ultimately in terms of risk assets, whether it’s stocks or high-yield bonds or even bonds themselves that those types of returns will reflect a slower rate of growth. In other words, instead of 8 to 10 percent in terms of return for risk assets, you should expect 4 to 6 percent. Reduce your expectations.”

With the 10-year Treasury note yielding just shy of 4 percent, Gross said that number would work as a realistic expectation for growth.

“A company like Pimco hopefully can produce something beyond that because that’s our historical track record and that’s something investors look for us to do.”

But he cautioned that investors “looking to send their children to college or retire on those types of returns, that’s going to be a stretch. You just have to reduce your expectations.”

Jack Bogle, founder of the Vanguard funds group, was less pessimistic about market returns, though he’s troubled by the inability of Congress to come up with reforms to the financial system.

“We ought to be able to get from these earnings levels maybe earnings growth of 6 percent and total returns from stocks a little bit over 8 percent, and I think that’s a reasonable forecast,” he said. “The fundamentals of stock returns ought to be about 8 percent and 4 percent in the bond market. When you compound those numbers of 10 years, that’s almost 100 percent for stocks and 50 percent for bonds. That’s a big difference.”

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