Bill Gross of PIMCO appeared on CNBC shortly after [this month's] employment report and commented that we are now in a world of lower returns, where returns on high-grade corporate bonds will beat stocks. No longer, Gross said, will stocks beat bonds by 5% as the work of Jeremy Siegel found in historical data. His remarks echo a report by Robert Arnott, an associate of PIMCO, titled “Bonds: Why Bother?” that is forthcoming in the Journal of Indexes and widely circulated among the press and on the internet [and in this blog, via Barrons, 3.28]. In that paper, Arnott claims that “the much-vaunted 5% risk premium for stocks is at best unreliable and is probably little more than an urban legend of the ﬁnance community!” Arnott claims that the true excess return of stocks over bonds is closer to 2.5%. Although my name is not cited, Arnott’s claims are clearly a challenge to my work, Stocks for the Long Run.
Yet I have never claimed the risk premium of stocks over government bonds is 5%. In the latest edition of Stocks for the Long Run, where data through 2006 is analyzed, the excess return is 3.3% per year. When updated through 2008, which includes a vicious bear market in stocks and a huge bull market in government bonds, the long-run data point to a 2.9% advantage... Furthermore, even Arnott agrees that once stocks are down ﬁfty percent from their highs, forward looking stock returns have been substantially above the average, and given the low rate on government bonds, I know of no one predicting good returns from this asset class looking forward.
--- Jeremy Siegel's Commentary, 4.3.09