Bill Gross says the 'cult of equity is dying.' Is he right?
Bill Gross' name may be synonymous with bond investing, but PIMCO's co-founder and CIO isn’t shy about weighing in on equities. During the keynote address that kicked off the 2011 Morningstar Investment Conference, Gross suggested that, with interest rates at anemic levels and with inflation essentially having nowhere to go but up, income-seekers should favor high-quality dividend-paying stocks over most flavors of fixed income. Gross mentioned energy concern Southern Company
Some in the audience seemed surprised by Gross’ equity-centric comments, but that probably owed to his candor about the prospects for bonds. When the manager of PIMCO Total Return PTTRX--with assets in excess of a quarter trillion dollars--touts stocks over bonds, that's newsworthy even if the suggestion he made seemed merely sensible at the time.
This Year's Model
It seems sensible now, too. Yes, even the sturdiest of stocks will subject investors to more volatility than will investment-grade bonds. Yields on five -, seven-, and 10-year Treasuries are currently negative in real (inflation-adjusted) terms, though, and the 30-year Treasury bond pays a whopping 0.50%. Yields on corporate bonds are also paltry. The iShares iBoxx $ Invest Grade Corporate Bond
Topnotch actively managed mutual funds in Morningstar's intermediate-term bond category aren’t faring any better in terms of yield, either. Dodge & Cox Income
Long Live Stock
It’s a different story among equities, dividend-payers included. Despite a rally among income-producing stocks so strong that some are using the B word to describe it, disappointed fixed-income fans can still find compelling opportunities with attractive risk/reward profiles.
Johnson & Johnson, for example, currently yields roughly 3.5%, and trades in line with most of its historical price multiples. Daimler AG
Yet even though the advice Gross gave in 2011 still seems sound, he’s no longer offering it. With his characteristic gift for overstatement (and a newfound knack for Romantic poetry), Gross declares flatly in his most recent Investment Outlook, "The cult of equity is dying. Like a once bright green aspen turning to subtle shades of yellow then red in the Colorado fall, investors' impressions of 'stocks for the long run' or any run have mellowed as well."
Gross doesn’t have particularly high hopes for bonds, either. In his view, the prognosis for long-term Treasuries especially is, sticking with his metaphor, even more morbid.