Pacific Investment Management Co.’s Bill Gross said investors should say “good evening” to the prospect of future capital gains in asset markets as interest rates are set to rise while the economy grows at a slow pace.
“The global economy is left to depend on economic growth for further advances and it is growth that is now and has recently been historically deficient,” the manager of the world’s biggest bond fund wrote in a commentary on Newport Beach, California-based Pimco’s website. “As yields have bottomed and are now expected by the markets to gradually rise, it’s down to growth, and growth is a question mark.”
Investors should “own bonds and an average proportion of stocks too,” Gross wrote, adding that high quality Treasury and corporate bonds are fairly priced, although they are not cheap.
The $225 billion Total Return Fund managed by Gross has returned 3.62 percent this year, trailing 60 percent of peers, according to data compiled by Bloomberg. The Bloomberg U.S. Treasury Bond Index (BUSY) gained 3.6 percent this year, while the Standard & Poor’s 500 Index has advanced 7.8 percent.
“Two percent real growth since the Great Recession is nothing to brag about,” Gross wrote. Growth has fallen “due to a yawning gap of aggregate demand relative to aggregate supply.”
Gross domestic product rose by a stronger-than-forecast 4 percent in the second quarter, after contracting by a revised 2.1 percent in the first quarter, according to a Commerce Department report today.
Demand is deficient as consumers have too much debt, so-called baby boomers are getting older, workers are “outdated and outjobbed” by technology and corporations have power to contain wages, Gross wrote.
Asset price growth “will be harder to come by,” he said. “Without the tailwind of declining interest rates, which have increased profit margins as well as decreased cap rates, they will instead face structural headwinds.”
Competing firms such as BlackRock Inc., the world’s biggest asset manager, disagree.
“When the Fed starts moving, the front end of the yield curve will start moving up,” said Rick Rieder, BlackRock’s chief investment officer for fundamental fixed-income, who helps to oversee $650 billion in assets. “While financial assets could initially trend lower, I still think we’ll be in a low rate environment for a long time. Even though the Fed may be removing some of the easy policy, financial assets will continue to perform well.”
The Federal Reserve said today after the conclusion of a two-day meeting that slack in the labor market persists even as the economy is picking up. Policy makers continued to trim monthly bond purchases and reiterated that interest rates will likely stay low for a considerable amount of time after the quantitative-easing program ends.
Traders see about a 65 percent chance the Fed will raise the target for its benchmark to at least 0.5 percent by July, based on futures contracts.
“The Fed will be on hold until mid-2015 and will hike only gradually to our new neutral 2 percent by 2017,” Gross said in the commentary, released before the end of the Fed meeting.
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