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“Don’t fight the Fed” is a popular mantra when it comes to investing. But recent history shows that aggressive monetary stimulus by major central banks doesn’t ensure big gains for stock-market investors.
In an outlook published Wednesday, Pacific Investment Management Co., or Pimco, warned that the next three to five yeas will likely be marked by lackluster asset market returns as it will be difficult to expect continued gains in equity and bond-market prices given already high valuations.
And that’s despite the Federal Reserve and other central banks engaging in aggressive rounds of interest rate cutting and asset purchases this year to support economies hit by the coronavirus pandemic.
“The low yield environment and reach for investment returns may continue to support equity markets. But starting valuations should dim any excessive optimism,” said the report, authored by Joachim Fels, Andrew Balls and Daniel Ivascyn.
“Indeed, the long-term history in Japan over decades and the shorter experience in Europe over the past few years show that there is no guarantee of outsized gains for equities over bonds, even in a very low yield environment,” they wrote.
U.S. stocks have rebounded sharply from their March pandemic lows, with the S&P 500 (SPX) and Nasdaq Composite (COMP) returning to record territory before a September pullback. The S&P 500 was up 1.3% on Wednesday, putting the index up more than 5% for the year to date. The Dow Jones Industrial Average (DJIA) was up around 430 points, or 1.5%, leaving the blue-chip gauge down around 1.2% so far in 2020.
They warned that the environment over the next three to five years is likely to contrast with recent investor experience, arguing that the rise in profit share that benefited earnings could stall due to de-globalization, increased regulation and taxation, and a transition from shareholder to “stakeholder” capitalism.
It would make sense for portfolio managers and asset allocators to lower their return expectations rather than “stretch too far and extend too far down the quality spectrum in hope of maintaining historical levels of returns,” they said, noting there is “no shortage of examples from history where investors experienced multiyear periods of flat investment returns, or worse.”
The experience of the past decade isn’t necessarily a guide for the 10 years ahead, they said, adding that they expect a broadly rangebound environment for government bond yields for much or all of the next three to five years.