Bill Gross said that the current financial market is “excessively prosperous,” and investors should take precautions against high winds and waves.
Although the Fed's continuous interest rate hikes have brought interest rates to the highest level in more than 20 years, and the inflation-adjusted 10-year US Treasury yield has risen by about 300 basis points in the past two years, the S&P 500 index rose historically above 5,200 points this week, and the cumulative increase over the past 12 months has increased to 33%.
Gross, former co-founder and chief investment officer of Pimco (Pimco), wrote in the latest investment outlook, “These trends tell me that fiscal deficits and the AI boom have overshadowed other factors. Since 2022, the market has been dominated by irrational prosperity, so everyone remember to fasten their seatbelts.”
Former Federal Reserve Chairman Greenspan used the term “irrational prosperity” in 1996 to describe the enthusiasm investors had for the stock market at the time.
Even Gross found it difficult to resist the temptation of the AI boom. He said he bought and sold Broadcom shares over and over again during the past week. The stock is one of investors' favorite artificial intelligence-related stocks.
Bonds are unattractive
Gross, who withdrew from the asset management industry in 2019, said that as the US government deficit widened, bonds lacked investment appeal. He believes that the 4.2% 10-year US Treasury yield reflects the market's belief that the inflation rate will drop from 3.2% to 2.3% by the end of this year, but this forecast is unlikely to come true.
“There is too much supply,” the former debt tycoon said when talking about the US Treasury bond market. “I can't understand what those new debt bosses are saying when they are touting bonds.”
Gross laments that all aspects of the economy and society have changed in the past 20 years, ranging from gasoline prices to beach attire, but one thing that hasn't changed much is that 10-year Treasury yields are similar to those of 20 years ago.
Gross said that his current strategy is to increase 2-year US bonds and short 5-year and 10-year treasury bonds. This kind of trade, which bets on a steeper yield curve, has always been quite popular among investors who bet that the Federal Reserve will cut interest rates.
Gross also said that investors should avoid seizing the “falling knife” of regional banks until the Federal Reserve cuts interest rates later this year. He thinks Truist Financial Corp. is relatively attractive because the bank's exposure to commercial real estate is low.