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2012 Stock Returns Defy Bill Gross’ Dire Predictions

TradingPub Admin | January 8, 2013

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Want some first-hand evidence of how the dire predictions of market experts were proven false in the recent past? The gains that stocks have made in the last several years have defied the 'new normal' predicted by bond fund manager Bill Gross, which involves tepid economic growth and lackluster returns on both equities and bonds.

Gross, who is both the founder and co-chief investment officer at asset manager Pacific Investment Management Co., teamed up with Mohamed El-Erian, the firm's other co-chief investment officer, to make this dire prediction.

Mixed accuracy 
Bloomberg reports that the market experts were accurate about the weak expansion in the worldwide economy's gross domestic product. Data compiled by the media outlet indicates that this global economy most likely grew at a rate of 2.2 percent in 2012. Comparatively, the world's GDP increased at an average of 3.2 percent for every year in the decade before the financial crisis.

Strong asset growth 
Fixed-income securities generated higher returns in 2012 than the average of the past 16 years, according to the news source. The S&P 500 Index had a very strong 2012, surging 13.4 percent during the year. The MSCI All-Country World Index of equities had an ever better rally, spiking 16.9 percent, Bloomberg News reports.

Central easing
The robust returns generated by these assets has been largely attributed to the monetary easing of central banks worldwide, as these financial institutions fed demand for stocks and bonds by increasing the money supply.

PNC Wealth Management chief investment officer James Dunigan caught this idea, saying that the widespread global easing "had a big impact on reducing the fears of a recession. There was also the support from the corporate earnings side. It was just a matter of time to have stocks outperforming."

"They've underestimated how big the policy response would be and what type of positive impact it would have on financial markets," Jay Schwister, a managing director and senior money manager in Milwaukee at Baird Advisors, which has $17 billion of bonds under management, told Bloomberg during a telephone interview. "From the real economy standpoint, the new normal that Pimco forecast is pretty much playing out."

'New Normal'
The 'new normal' that Gross described in an October 2009 report reflected the economic pessimism that many had at the time. Recently, markets have been prone to risk aversion and wariness.

One factor that was blamed for this mindset is the Fiscal Cliff, which threatened to afflict the U.S. economy with more than $600 billion worth of higher taxes and spending cuts per year.

Gross managed to draw substantial visibility when he issued the report, which predicted a new scenario in which "the deleveraging, re-regulation and de-globalization that will weigh on growth is likely to be the new model in the foreseeable future." In the report, the authors predicted that the returns generated by assets would fall to 50 percent of what they generated in the last 10 or 20 years.

These market experts did not envision a record amount of stimulus provided by central banks, according to the news source. While 2012 was a very strong year for stocks and bonds, Saumil Parikh, Pimco’s co-head of asset-allocation strategy, wrote in a January 4 email that "2013 will be a year of reversion to the medium-term 'new normal' view for both the economy and financial markets."

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