Key Takeaways:
- Bill Gross attributes the current market records to the ongoing frenzy surrounding artificial intelligence (AI) and substantial federal spending.
- He cautions investors about the potential for “excessive exuberance” in the market as a result of these factors.
- Despite historical increases in Treasury yields, Gross is taking a short position on 5- and 10-year Treasury notes.
- His decision to short these bonds suggests a skeptical outlook on traditional fixed-income securities amidst changing market conditions.
Stock have notched a string of record highs this year, driven by a tech frenzy and high federal spending that have blotted out all else, Bill Gross wrote in his latest investment outlook.
The factors propelling the S&P 500’s remarkable ascent, including fiscal deficit spending and AI enthusiasm, have led to a more than 20% surge in the index since mid-2022, even amid a backdrop of rising interest rates and Treasury yields.
Bill Gross, co-founder of PIMCO and renowned bond investor, highlighted the resilience of the stock market in the face of a 300-basis point increase in 10-year inflation-adjusted yields over the past two years. He attributed this phenomenon to the overriding influence of fiscal deficit spending and the fervor surrounding AI technologies.
Gross cautioned that this trend towards “excessive exuberance” is unlikely to dissipate anytime soon, suggesting that investors should prepare for further market euphoria.
Traditionally, declining bond yields precede periods of stock market optimism. However, Gross noted that while Treasury rates have experienced a resurgence, he remains skeptical about re-entering the bond market, particularly given the oversupply of 10-year notes.
Instead, Gross outlined his strategy, which involves taking long positions on two-year notes while shorting 5- and 10-year Treasurys. He anticipates a flattening of the yield curve as short-dated rates rise to align with longer-term yields.
While Gross acknowledged some involvement in trading related to the AI frenzy, his primary focus over the past year has centered on pipeline master limited partnerships (MLPs) and regional banks.
MLPs have seen significant gains, driven by higher oil prices, and offer attractive tax-deferred yields averaging around 9%-10%. Despite cautioning investors about entering the sector at its current valuation levels, Gross highlighted Western Midstream Partners as a standout performer.