Prophets of Doom With Too Much Gloom

But everything is likely to be different if Gross and Singer's doomsday scenario plays out. Consider that while the S&P 500 gave up 50.9% from November 2007 to February 2009, the HFRI Index was down only 21.4% and the Aggregate Bond Index was up 6.1%.

Gross did even better. His Pimco fund returned 7.5% from November 2007 to February 2009. Singer outpaced his peers, too. Elliott Associates was down only 3.1% in 2008.

In other words, a market meltdown is likely the best thing that could happen to Gross and Singer.

I have concerns about the lofty levels of U.S. stocks, too (here, here, here, here, here and here). But Gross and Singer must also acknowledge that rich valuations don't necessarily mean that a market collapse is inevitable. 

The market could instead hang around its current level for years, waiting for earnings to catch up with stock prices. As my Gadfly colleague Stephen Gandel recently pointed out, there are credible reasons why the big corporations that dominate the S&P 500 could remain highly profitable for the foreseeable future — the most compelling of which is that big corporations are bigger and more powerful today than they've been in generations. And while those companies remain profitable, it's hard to imagine a market meltdown.

 It's worth pointing out that in either case — whether stock prices tumble or just hang around — returns from stocks would be muted for years, which would give Gross and Singer an opening to outpace stocks going forward. But without a sharp market decline, they're unlikely to recreate the spectacular outperformance achieved during the financial crisis — and collect the accolades and asset flows that go along with it.  

Gross and Singer are entitled to dream, but the glory they envision is far from inevitable.