Bill Gross is managing director and co-chief investment officer at Pacific Investment Management Co. LLC.
Bill Gross is managing director and co-chief investment officer at Pacific Investment Management Co. LLC.
What is your outlook for the economy, interest rates and the bond market in the second half?
Pimco refined its previous view that the global economy has embarked upon a bumpy, multiyear journey toward a destination known as the “new normal.” Some features of this destination are weak growth in developed economies, migration of growth and wealth toward emerging markets, a protracted need for private-sector balance sheet rehabilitation, along with deteriorated public finances, and the increased importance of politics amid heightened government involvement in financial markets.
The refinement to our new-normal thesis is that the journey will be even bumpier, and the destination more unstable, than we originally thought. It will be a world of shifting risks and opportunities, with a wider range of potential outcomes, as well as a higher probability of extreme outcomes. An analogy would be that of a car headed through unfamiliar territory on an uneven road having already used its spare tire. This analogy derives from Pimco's views on traditional issues such as growth, balance sheets and inflation.
Systemically important emerging economies such as China, India and Brazil are likely to maintain their relatively rapid growth, gradually broadening their engines for income and employment creation. Developed economies such as Europe and Japan will likely grow much more slowly. Europe is in the midst of a fiscal deflationary drag that calls into question the very makeup of the eurozone and its supporting institutions. Japan will face increasing demographic and debt head winds that will blunt already weakened drivers of sustainable growth.
The picture for the U.S. and U.K. is more mixed. The U.S. has important assets such as its reserve-currency status, a dynamic and flexible economy, and a vibrant corporate sector but it faces structural challenges. Chief among these are highly leveraged government and household balance sheets, and toxic political polarization.
Over the past few years, governments around the world stepped in to support balance sheets that expanded beyond sustainable levels, the latest example being attempts by the European Union to shore up Greece. With public finances of many developed economies now stretched to the limit, it will be difficult to find an unencumbered balance sheet — another spare tire — that can sustain existing levels of debt. Attempts to shift sovereign debt onto central-bank balance sheets could raise the specter of debt monetization and fuel inflation expectations.
This potential evolution will proceed at different speeds in different parts of the world. It is well under way in emerging economies and will most likely remain so. Excess capacity in labor and product markets in developed economies will retard the evolution there. The U.S. will likely be next to feel some inflationary pressure, with Europe to follow and Japan lagging.
Where do you see the Dow Jones Industrial Average, the S&P 500 and the Nasdaq Composite Index finishing the year?
Equity markets are re-pricing for slower growth and increasing risk. Equity indexes should drop 5% from current levels, with the Dow finishing at 9,500, the S&P at 1,030 and the Nasdaq at 2,130.
What worries you most about the markets and the economy over the remainder of the year?
Policymakers have reduced flexibility to support individual economies and financial markets. Quantitative-easing programs have ceased in the U.K. and the U.S., and the E.U.'s rescue efforts may not be totally effective.
What one investment-related suggestion would you make to financial advisers?
Believe in the new reality of a new normal, where economies grow at half-sized rates and assets return 4% to 6% over the long term.