Nine months later, Bill Gross, known as the "old debt king", published his second investment outlook after retiring from asset managers, saying that "in the near future, value stocks should be the first choice for investors compared with growth stocks." "

Although it is now dominated by growth stocks, Amazon.Com Inc, Microsoft Corp and other tech giants will not continue to dominate the stock market slump and recovery this year if inflation-adjusted bond yields rebound from historic lows, Bill Gross said.

The following is the full text of the latest investment outlook of "Old Bond" (revised):

It has been some time since I last released my investment outlook, but tonight is completely different. The epidemic, the economy, the market and the media have all changed. The current financial media is also different from what I experienced in my early years. The guests invited always answered "this is a good question" after the host asked a question, but did not give a good "answer".

Anyway, the following is what I want to say, and I hope you can read some ideas from it.

My purpose in writing this article is to try to provide a view of stocks that is not necessarily unique but certainly rare, and why they perform so well, especially growth stocks. Of course, most of the world's economies have reopened, and there are hopes for vaccines. If not, novel coronavirus did not disappear, but people's worries about him gradually faded.

But another possible explanation is that real interest rates have been falling in recent years and have been near record lows.Over time, stock prices will be significantly affected by real interest rates rather than nominal interest rates, which include the prospect of inflation and (now) deflation. Value-oriented investors will know that the Gordon dividend discount model shows that "P" equals the stock price, "D1" equals the current dividend amount, and "Rmurg" is the most confusing "required rate of return" minus the expected growth rate of future dividends.

Over time, this formula provides a reasonable estimate of stock prices. But the Fed's intervention in markets, such as implicit guarantees and trillions of dollars in deficit spending, somewhat undermines the superficial logic of the formula's investment approach. Today, many investors believe in (or worry about) trend-based algorithms and want to return to the old normal economy, with the Fed focusing more on inflation and the real economy than on stock prices and unemployment.

Few people have heard of TIPS or real interest rates, and their impact on markets and even market sectors such as economic growth, and why future growth rates should be more reliable and illogical than the more verifiable current real interest rates. This also explains why Apple Inc shares are more popular than Coca-Cola Company at present.

I believe that one of the important reasons why growth stocks perform well is that lower real interest rates are more important to them. The formula basically assumes that when the real interest rate of 10-year or long-term TIPS falls, r will fall, other conditions remain the same, and because high-quality growth stocks such as Amazon.Com Inc or Microsoft Corp will maintain a consistent growth rate in the future, both before and after the epidemic.

When real interest rates fall as they have in the past few years, the discount rate (D) of current dividends soars. The 150-200bp fall in real long-term interest rates in recent years could have an impact of up to 50 per cent on the prices of Apple Inc or Amazon.Com Inc, and everything else is the same. But the impact on cyclical or value-oriented stocks is much smaller because their expected growth rates (g) usually fall as well. For them, a drop of 150-200 basis points in (g) would match a drop in real interest rates and keep the prices of these stocks unchanged by keeping the denominator in the formula unchanged.

You don't believe me? You might say that other important factors, such as trends, are much more statistically relevant to price changes. This is a textbook formula that may be useful in 10-20 years, but is that certainly not the case in today's crazy market?

I probably agree with you, except that "real interest rates should also be taken into account" and the recent and persistent impact. Here is an interesting grapevine to ponder. In the past two years, the price of Microsoft Corp (perhaps the most stable of all stocks) has a correlation of 0.854r ^ 2 with TIPS. As soon as TIPS goes up, Microsoft Corp goes up. When TIPS falls (real yields rise), Microsoft Corp falls. (of course, this linkage happens on the same day, but with a time difference of one to two weeks.)

What is the trend of TIPS and real interest rates in the future?

At the time of writing, the 10-year TIPS was-75bp, and two years ago it was as high as 100bp. In the past few years, TIPS has fallen by nearly 200bp, which may be at least half of the rise in Microsoft Corp's share price, which has also been boosted by higher growth rates, market trends and index funds.

The 10-year real interest rate, at negative 75bp, is rapidly approaching yields in Germany and Japan. Yields in both countries are so low that the only buyers are governments and regulated pension funds.

So, to me, the price gap between the present and the future of Microsoft Corp, Apple Inc and Amazon.Com Inc is relatively small, but for value stocks, such as Coca-Cola Company or Procter & Gamble Co, the future price gap will be affected by the continued decline in real interest rates. in my opinion, these companies will experience their best times. Relative to growth stocks, value stocks should be the first choice for investors in the near future.

So, do long the future outbreak of the plate, enjoy the next market set sail.

At the end of the article, Bill Gross, the old debt king, said that happiness was completely unaffected by COVID-19 's epidemic, and that happiness was a healthy body and an investment value stock.