Bill Gross of PIMCO, aka The Bond King, caused quite a stir when he came out with his Death of the Cult of Equities outlook a couple of months ago. While he has written much more altruistic writings to avoid the criticism of late, what Gross was really discussing was that low returns from stocks and bonds are going to be the new normal. Now we have a new outlook from PIMCO’s Saumil H. Parikh called Forecasting Equity Returns in the New Normal. This hardly feels optimistic.

Parikh did call equities a necessary component of long-term portfolios. The problem is that his projection said:

Under our baseline assumptions, we forecast the broad U.S. equity market to produce nominal annualized total returns in the +4.0% to +5.1% compounded per annum range over the next five to 10 years.

Here is the problem. This is a total return analysis, which means that it includes dividends and buybacks. If you just look through our own list of high dividend stocks that have short seller activity in them, most of those stocks are yielding 4% to 5% as is. This forecast implies that there is almost no expected price appreciation and that the return from those stocks will only come from the dividends.

And the caveat against the potential unlimited upside said:

But, as one might expect, unlimited upside potential comes with substantial downside risk. Negative surprises in economic growth (among other influences), especially unanticipated economic contraction, can impart significant downside risks and permanent loss on equity returns as well.

Parikh goes on to discuss the importance of real GDP growth playing into this as well as dividends and stock buybacks with a clean focus on value and trying to pick limited downside. His full report is here.

JON C. OGG

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