Bill Gross cautions investors about the potential turbulence in financial markets, attributing it to widespread "excessive exuberance." He observes this trend despite the S&P 500 Index's remarkable 33% gain over the past year, reaching over 5,200 points for the first time. This surge has occurred in the context of the Federal Reserve's significant monetary tightening, which has increased the benchmark rate to a two-decade high and boosted 10-year inflation-adjusted yields by about 300 basis points in two years.
Gross identifies fiscal deficit spending and the excitement around artificial intelligence (AI) as the primary drivers of market momentum since 2022. He draws parallels to former Fed Chair Alan Greenspan's 1996 comments on "irrational exuberance" in the stock market. Despite his reservations, Gross admits to being captivated by the AI stock craze, specifically mentioning his recent trading experiences with Broadcom Inc., a popular AI-related stock among investors.
On the topic of bonds, Gross expresses skepticism, citing the swelling US government deficit and the unattractiveness of bonds. He doubts the 10-year Treasury yield's implication that inflation will decrease to a 2.3% annual rate by year-end, from the current 3.2%. His current strategy involves going long on two-year notes while shorting five- and 10-year bonds, anticipating a curve-steepening trade as investors expect the Fed to cut rates.
Gross also touches on the stock market, noting that his previous interest in pipeline master limited partnerships (MLPs), particularly Western Midstream Partners, has waned, although the Global X MLP ETF has seen a 29% return in the past year. He advises caution regarding regional banks until the Fed reduces rates later this year and highlights Truist Financial Corp. for its minimal exposure to commercial real estate.
