Bill Gross of Pimco fame has a well-earned reputation for being spot-on when it comes to making prescient macroeconomic calls. Gross and his colleagues sawtrouble brewing in the housing market years before most other gurus and economists began to suspect something was wrong. His flagship Pimco Total Return Fund (PTTAX) has racked up one of the best long-term performance track records in the fixed income world.
In recent years, Gross, along with Pimco CEO Mohamed El-Erian, have been pushing the idea of a "new normal" -- a time of below-average economic growth, greater regulation, and lower returns on both stocks and bonds. Given the sluggish state of the economy and the maddeningly slow pace of economic recovery, Pimco's predictions seem to be rather on-target. But there is one prominent investor who vehemently disagrees with Gross and El-Erian on the outlook for the economy and for investors.
At the recent Forbes Global CEO Conference in Sydney, Ken Fisher, CEO of Fisher Investments, decried the idea of a low-growth, low-return "new normal" environment as "idiotic." He predicted that the next 10 years would be just as good as the 1990s and that our problems today really aren't any different and unique than in the past. He indicated that the current fear and pessimism so prevalent in today's market is normal after such a bear market but represent "just fears of much ado about nothing."
After hearing so many tales and predictions of prolonged Depression, lost retirement savings, and doom for the housing market, it's refreshing to hear someone put forth a more optimistic outlook for investors. But is his rosy scenario plausible? Is it possible that the majority of pessimistic investment professionals and investors are wrong and Fisher is right?
Well, considering that most people didn't see the current financial crisis coming, it certainly is possible that a minority view is accurate. Behavioral economics has shown us that when times are good, people tend to think those good times will continue, and when times are tough people tend to see the future as a continuation of their current difficult situation. So could another decade like the roaring 90s be too much to hope for?
Tomorrow vs. next week
Personally, I think there is something to both Fisher's and Gross's outlooks. I think Gross is correct that the next few years are likely to be difficult and marked by subpar growth. The economy is recovering and growing, but this recovery has been slower and less robust than any in the postwar period. It will likely take several more years to bring unemployment down to anywhere close to pre-recession levels and the overhang in the housing market will also likely take a long time to correct. Returns on most investments probably won't impress. Most importantly, given that political gridlock is a likely outcome after November's elections, odds are slim that the government will be able to do much to help or change course in the immediate future.
But while the outlook for the immediate future may in fact look much like Gross's new normal scenario, I do think that prospects are brighter over the longer-run picture. Given that the past decade has been one of the worst on record for stocks, that old reversion to the mean maxim tells us that chances are good that stocks will produce better than average returns over the next 10 years. Valuations are fairly reasonable and stocks are looking much more attractive than bonds. And despite the many longer-term structural problems facing our nation, investors would be wise not to underestimate our economy's ability to heal and adjust to new realities. I don't think I would go so far as to say the next decade will be as good as the 1990s, but even if stock returns are merely average or even slightly below average, there's not much else out there that will produce higher returns in the coming years.
A tale of two economies
So if there are two very different economic scenarios ahead of us, how should one invest today to avoid the worst and capitalize on the best of these future markets? First of all, investors will need to be very concerned with volatility in the next few years. That means if you need your money in the next five years, the stock market is not the place for it. However, if you have a long-term investing time horizon and are hiding in bonds out of fear, put that money to work in the stock market! Investing in a low-cost, broad-market exchange-traded fund like the SPDR S&P 500 (NYSE: SPY ) or Vanguard Total Market Stock ETF (NYSE: VTI ) might be a good move here.
With uncertainty and volatility likely entrees on the menu for the next few years, investors should focus on high-quality, financially stable companies. Safer, less exciting consumer or health care names that pay reliable dividends are a good choice for challenging times. Johnson & Johnson (NYSE: JNJ ) has a strong stable of patents and recognized brands which should protect its business and contribute to future growth.McDonald's (NYSE: MCD ) offers a history of solid and increasing dividend payments and a business model that is fairly recession-proof, while Procter & Gamble (NYSE: PG ) offers a hefty dividend yield, strong free cash flow, and high net income margins compared to its peers.
But beyond a cautious outlook for the near future, there are more opportunities for longer-term growth. In fact, growth-oriented stocks have been overlooked for most of the past decade. I still think this corner of the market is ripe for a comeback once the economy gets on more solid ground. In this space, industry leaders Apple (Nasdaq: AAPL ) and Google (Nasdaq: GOOG ) should do well. Apple still has a lot of growth potential as its products gain popularity in overseas markets, while Google should be helped by its continued market dominance, hefty cash stores, and efforts to expand offline . So don't forget about growth names in your portfolio.
The coming years are likely to be challenging ones for investors as we adjust to a "new normal" in the wake of the most severe recession since the 1930s. But the longer-run picture is brighter and holds many more opportunities for investors willing to wait out the difficult times ahead.
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