Gross Expectations: Guru Sees 5% Returns From Stocks and Bonds Ahead

CHICAGO -- Bond guru Bill Gross depressed an audience of financial planners at the 2001 Morningstar Investment Conference by predicting stock and bond returns of 5% in coming years.

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"We are moving into an age of diminished expectations," Gross said as planners suddenly lost their appetite for the chicken on their plates. "Dickens' book was called Great Expectations and that's the title for investing in the 1990s. The title they should have now and going forward is Diminished Expectations."

Gross, the only fund manager to win Morningstar's coveted manager of the year award twice, oversees the management of more than $220 billion in bond-fund assets for Pimco. That includes the (PTTAX Quote)Pimco Total Return fund, this year's top-seller in the wake of the Nasdaq's collapse.

Gross offers a simple reason for his less-than-rosy prediction: Excess. Thanks to increasing globalization and technological advancement, corporate productivity, profits and stock returns skyrocketed and now it's time to pay the piper. He thinks economic growth will cool in coming years, putting corporate profits and investment returns in a vice.

"We simply overdid it. We bought stocks at high prices, we undersaved and we overinvested. It's what capitalists do," Gross said.

The upshot is that the bubbles in the Nasdaq, tech investment and consumer consumption will deflate economic growth. He expects the economy to chug along at a 2% rate over the next few years.

The good news is that Gross doesn't anticipate deflation as these bubbles pop -- a la Japan -- but he does think it's time to get used to -- and be happy with -- single-digit gains.

"Absent a Japaneselike deflation, the return from bonds will mimic 5% or so. That's certainly less than you've gotten used to," Gross said. "Given 2% inflation, about a 1% dividend yield and 2% economic growth, that works out to about a 5% return for stocks, too. Stocks are overvalued and we won't see the 10% or 15% returns we've come to expect."

His advice for investors in this environment is to keep their costs low and stick with their strategies.

He left the silent audience with a Will Rogers quote. Gross said when the columnist/icon was asked what return he expected from the stock market, he replied, "I'm not concerned so much about the return on my money, as with the return of my money."

Happy Tuesday.