Former 'bond king' Bill Gross warns 'irrational exuberance' is driving stocks higher

By Joseph Adinolfi

Erstwhile "Bond King" Bill Gross doubled down on his stock-market skepticism in his latest investment outlook, where he warned that "irrational exuberance" has driven markets since 2022.

But anticipating when investors enthusiasm for stocks will finally fade remains as difficult as ever, he said.

Gross kicked off his latest missive by lamenting some of the changes that have occurred over the past 20 years, from the composition of women's beachwear to the price of gasoline. But one thing that hasn't changed between today and 2004: the yield on the 10-year Treasury BX:TMUBMUSD10Y is still at 4.2%.

Of course, there have been plenty of fluctuations in the interim: the yield on the benchmark U.S. Treasury note has risen 300 basis points over the past two years.

The fact that stocks have continued to march higher despite such a dramatic rise in borrowing costs is telling, according to Gross.

"It tells me that fiscal deficit spending and AI enthusiasm have been overriding factors and momentum and 'irrational' exuberance have dominated markets since 2022," he said.

"Irrational exuberance" was famously used by former Federal Reserve Chairman Alan Greenspan in a December 1996 speech in reference to the then-fledging bubble in technology stocks. Like Greenspan said back in 1996, it's impossible to know ahead of time when the market's "excessive" exuberance might finally start to flag. Gross said that remains true today.

After all, even Gross hasn't been able to resist the temptation of betting on an artificial-intelligence "wonder stock" despite knowing little about its business. He said he has been "whipped back and forth" by bets on Broadcom Inc. (AVGO), first going short, then going long this past week as the company's shares have rallied more than 10%.

Over the past year, Gross has regularly touted investments known as Master Limited Partnerships, or MLPs, dividend-paying entities that invest in oil and gas projects, but after strong gains over the past year, he is growing more cautious on the space, he said.

These products aren't widely covered by the financial press, but the Global X MLP ETF MLPA is up 26.9% on a total return basis over the past year, according to FactSet data. That's just shy of the 31% total return for the S&P 500, which includes dividends.

There is one MLP that Gross believes is still undervalued, however: Western Midstream Partners (WES). That's because investors have seemingly failed to price in a recent 40% dividend hike.

Gross recommended buying regional banks around nine months ago, and noted that investors who had bought in around then would be sitting on a gain of more than 26%, which is about as much as the SPDR S&P Regional Bank ETF has gained since late June, according to FactSet.

While he recently cautioned against trying to "catch a falling knife" in regional-bank stocks in a post on X, he noted that banks more broadly could catch a bid if the Fed follows through with plans to cut interest rates. He touted Truist (TFC), citing its minimal exposure to commerical real estate, and advised readers to "be exuberant in a month or so."

Finally, Gross expressed some doubts about investing in bonds, arguing that there is "too much supply" as federal budget deficits have remained wide.

However, he did say that he is short the two-year Treasury note and long the five-year and 10-year, a trade known as a "curve steepener" since it's a bet that the relationship between short-term and long-term rates will normalize.

Bond yields move inversely to prices. Yields on the two-year note have been higher than 10-year yields for a near-record stretch of more than 400 trading days, according to FactSet data.

"Bet on a flattening of the negative yield curve. Sooner or later it must go positive if the economy is to stay positive. I am long 2s and short 5s and 10s," Gross said.

Best known for co-founding fixed-income asset-management giant Pimco, Gross officially retired from Wall Street in 2019 after a short-lived stretch managing money at Janus Henderson Group, which he joined after being forced out of the firm he helped to create.

But retirement hasn't deterred him from publishing regular investment outlooks, supplemented by posts on X and the occasional appearance on financial television networks like Bloomberg TV.

Investors' enthusiasm for stocks appeared to be taking a breather on Friday, with the S&P 500 SPX down 0.1% at 5,235 in recent trade, and the Dow Jones Industrial Average DJIA down 178 points, or 0.5%, at 39,602, according to FactSet data.

Both gauges are still on track for their best weekly advance of the year, while the Nasdaq Composite COMP, which was marginally higher in recent trade, is on track for its best week since January.

-Joseph Adinolfi

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03-22-24 1217ET

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