Pundits argue if the stock market era is over

Bill Gross and Jeremy Siegel

Bill Gross, Pimco founder and co-chief investment officer, says yes in his monthly outlook report saying stocks are a dying asset.

But Jeremy Siegel, finance professor at the Wharton School of the University of Pennsylvania, says stocks are still one of the most reliable and vital investment tools in a long-term approach.

In a market outlook report titled “Cult Figure” released Tuesday, Gross said some people overwhelmingly favored stocks over a century’s time but he said “the cult of equity is dying” as people will find it increasingly difficult to gain high yields through stock investments.

Gross said they will no longer generate the kinds of returns they’ve had over the past century.

Siegel, finance professor of Wharton School of the University of Pennsylvania, defends the power of stocks.

In his book, “Stock for the Long Run,” Siegel analyzed earning rates of U.S. stocks, bonds and the gold market from 1802 to 2006.

Reflecting inflation rates, the average compound rate of return on stocks from 1802 to 2006 was 6.8 percent per year, 3.5 percent per year for bonds and gold was nearly zero percent, meaning one dollar invested in stocks in 1802 would have grown to $755,000, in bonds to $1,083, in gold to $2.

Some market observers support Siegel’s view given that the Dow Jones index hovers around the 13,000 mark compared to below 100 in the early 1900s, which shows the index is still on an upward trend.

A century-long belief that shares will eventually rise created massive followers of stock investments and the 20th century is remembered as the period of deepest reverence for stocks, they said.

The Siegel constant of 6.6 percent real appreciation is “a historical freak, a mutation likely never to be seen again as far as we mortals are concerned,” Gross said.

“Like a once bright green aspen turning to subtle shades of yellow then red in the Colorado fall, investors’ impressions of ‘stocks for the long run’ or any run have mellowed as well,” Gross said. “The 6.6 percent real return belied a commonsensical flaw much like that of a chain letter or yes - a Ponzi scheme. If wealth or real GDP was only being created at an annual rate of 3.5 percent over the same period of time, then somehow stockholders must be skimming 3 percent off the top each and every year. If an economy’s GDP could only provide 3.5 percent more goods and services per year, then how could one segment [stockholders] so consistently profit at the expense of the others [lenders, laborers and government]?”

Siegel blasted Gross’ argument and made bearish comments about stocks when he appeared at CNBC on Tuesday.

“You definitely can have the return greater than GDP growth,” Siegel said. “There is nothing uneconomic about it. The thing is capital gives out dividends; interest gives out return.

“When you add that all together, it’s going to be greater than GDP growth. Even in a non-growing economy, you have situations where return is greater than GDP growth. That’s not an anomaly.”

Although he acknowledged the last 10 to 12 years have been poor years, he said stocks are still “one of the most attractive markets we actually have now going forward.”

Coupled with the economic downturn, investors seemed to be more attuned to Gross’ pessimistic outlook on the market.

David Rosenberg, a bearish economist and strategist at Canadian investment firm Gluskin Sheff, said the “equity cult is clearly over.”

By Ko Ran, Kim Mi-ju [mijukim@joongang.co.kr]