'Old Normal' S&P 500 Rally Beating 'New Normal': Was Ken Fisher Right?

If recent earnings are any indication, PIMCO might eat crow

The controversy over ‘new normal’—a concept of lower global GDP growth for the foreseeable future and coined by Bill Gross and his colleagues at Pacific Investment Management Co. (PIMCO)—continues to grow. Famed money manager Ken Fisher (left) called it “idiotic” at a recent gathering in Sydney, Australia, and it was a hot topic at this year’s Schwab Impact 2010 conference in Boston.

A report on Monday from Bloomberg will certainly add to the debate. The news service finds the rally that added about $2 trillion to U.S. equity values since July is telling money managers like Fisher that the new normal era of slower economic growth and lower stock returns has yet to arrive.

Bloomberg reports mining shares, automakers and retailers whose earnings are most tied to the economy have paced the 16% advance in the Standard & Poor’s 500 Index since July 2. The gauge surged 13% in September and October, the biggest rally for the two months since 1998. The U.S. economy grew at a 2% annual pace in the third quarter, the government said Oct. 29.

As Bloomberg notes, PIMCO, which oversees the world’s biggest bond mutual fund, said in May 2009 that rising government deficits and regulation would hold gains in equities and bonds below historical averages. Mohamed El-Erian (left), PIMCO’s co-chief investment officer, said last week that his projection has a 55% chance of coming true.

“Of the leading economic indicators, one of the most important is the stock market,” Laszlo Birinyi, whose Westport, Conn.-based Birinyi Associates Inc. advised clients to buy stocks when the S&P 500 began rising from a 12-year low in March 2009, told Bloomberg. “The market’s saying something, and it’s saying the economy is going to be surprising on the upside.”

“Investors must respect this rather tortuous journey in the months and years ahead for what it is: A deleveraging process based upon too much debt and too little growth to service it,” according to a letter on PIMCO’s website.

El-Erian said last week that the firm hadn’t ruled out different outcomes.

“Like all our analytical work, the new normal scenario is subject to continuous refinement to incorporate new information and analysis,” El-Erian, who is PIMCO’s chief executive. “Upside risk scenarios speak to the possibility of a faster coming on stream of consumer demand in emerging economies and the return of full policy effectiveness in the U.S.”

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