Get used to lower returns on stocks and bonds, Pimco's founder and co-chief investment officer Bill Gross told investors in his monthly letter.
Gross, who oversees Pimco's Total Return Fund (PTTRX), said that investors are entering a period of what he calls "rational temperance." By that Gross means that investors should expect gains from stocks, and corporate and high-yield bonds to be more muted.
Corporate credit and high yield bonds are somewhat exuberantly and irrationally priced. "Still that doesn't mean you should vacate your portfolio of them," Gross writes. Instead prepare to see returns in the range of 3% to 4%, instead of the double-digit gains enjoyed in recent years.
Gross leads off his letter citing a famous question posted by former Fed Chairman Alan Greenspan in 1996: "But how do we know when irrational exuberance has unduly escalated asset values?"
Reiterating that Greenspan's question quickly invokes images of the wreckage of the dot-com bust or the 2008 financial crisis. Gross offers a less ominous forecast. "On a scale of 1-10 measuring asset price 'irrationality', we are probably at a 6 and moving in an upward direction," he writes.
February's letter is also decidedly less scary than his writings just a month ago, when warned of the dangers of inflation and the flood of cheap money.
He suggests caution but not running for a bunker. "Be rational, be optimistic if so inclined, but temper it with a commonsensical conclusion that we have seen something similar to this before, and that previous outcomes seldom matched the exuberance."
In the meantime, it's okay to stay in stocks and bonds.
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