Bill Gross: ‘The new neutral’

Bull markets as we once knew them are a thing of the past - as are bear markets, advises Pimco's Bill Gross.

In 2009, Pimco, the world's biggest bond investor headed by Bill Gross, coined the phrase the new normal' to describe the post-crisis backdrop.

The phrase implied that a rapid bounce-back to pre-crisis growth rates wasn't going to happen. Pimco's latest five-year outlook returns to and extends this theme. We are now in the new neutral'.

Since the crisis, the private sector has worked off some of its borrowings, but governments have rapidly grown their debt piles. The risk is that the world "will be unable to grow and generate inflation at pre-crisis levels for many years to come", even if interest rates stay at rock-bottom levels.

Europe is unlikely to muster annual growth rates of more than 1.5% or so over the next few years and the potential growth rate in America has also been reduced, cheaper energy and private-sector deleveraging notwithstanding.

With the scope for growth reduced, the level of interest rates that are neither too high nor too low for the economy (the neutral level') will be lower then before the crisis. High debts also mean that borrowers' capacity to service or repay them is threatened by dearer money, another reason why rates will stay low.

What does this mean for assets? Returns will probably be subdued,as valuations are currently high."With yields so low, spreads so tight, and [cyclically adjusted] price-to-earnings (p/e) ratios above historical norms, there appears to be more risk than reward on the horizon."

The macroeconomic outlook is also uninspiring. However, with interest rates set to stay historically low, there seems little downside risk. Expect "an end to bull markets as we've known them, but no perceptible growling from the bears".

Pimco expects nominal annual returns of 3% and 5% from bonds and equities respectively over the next five years.

Recommended

Three clean energy stocks for your portfolio
Share tips

Three clean energy stocks for your portfolio

Professional investor Christian Roessing of the Pictet Clean Energy Fund highlights of his three favourite stocks at the forefront of the clean energy…
25 Jan 2021
The Arab Spring ten years on: a revolution that failed to blossom
Global Economy

The Arab Spring ten years on: a revolution that failed to blossom

Ten years ago, the Arab world was rocked by mass protests and popular uprisings that ousted long-reviled dictators. For the most part, the end result …
23 Jan 2021
The charts that matter: inflation, bubbles, and booze
Economy

The charts that matter: inflation, bubbles, and booze

As US stocks head higher into bubble territory, John Stepek looks at the charts that matter most to the global economy.
23 Jan 2021
The MoneyWeek Podcast: let's talk about bubbles
Stockmarkets

The MoneyWeek Podcast: let's talk about bubbles

Merryn and John talk about the many obvious signs of a bubble in certain assets, including tech stocks, TikTok, and stock-trading 12-year olds. It's c…
22 Jan 2021

Most Popular

Why we won’t see a house-price crash in 2021
House prices

Why we won’t see a house-price crash in 2021

Lockdown sent house prices berserk as cooped up home-workers fled for bigger properties in the country. And while they won’t rise quite as much this y…
18 Jan 2021
Inflation is the easiest way out of this – just don’t expect politicians to admit it
Inflation

Inflation is the easiest way out of this – just don’t expect politicians to admit it

The UK government borrowed £34.1bn in December, a record amount for that month. Britain's debt pile now amounts to 100% of GDP. How are we going to pa…
22 Jan 2021
When will the US stockmarket bubble burst?
US stockmarkets

When will the US stockmarket bubble burst?

With US stocks more expensive than before the Wall Street crash of 1929, there are growing signs of “mania”. But what will push markets over the edge?
22 Jan 2021