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Bill Gross says stocks and long-term bonds are overvalued and the US economy will decline.
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Bond King says stocks are too expensive compared to the risk-free assets and earnings of the company.
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Pimco’s co-founder expects the delayed impact of higher interest rates to dampen consumer spending.
Bill Gross warned to prepare for a decline in stocks and long-term bonds and the US economy to falter.
“I simply believe that based on the relatively low equity risk premium and relatively high private earnings rates, the market is overvalued,” says the billionaire investor known as the “Bond King.” Tell Bloomberg Friday.
In other words, the expected return from stocks and risk-free investments like 10-year Treasurys is about the same now, and stocks are priced at historic highs relative to company earnings.
“You want to be very cautious with valuations here on stocks, despite the AI and despite the momentum going forward,” Gross said. echo A warning he issued in July.
The US stock market has soared this year, buoyed by frantic hype about artificial intelligence, and growing hopes that inflation will subside, the Federal Reserve will cut interest rates, and the economy will escape recession. However, Gross said current valuations still seem overblown, and noted that the full impact of the Fed’s rate hikes from nearly zero to north of 5% since last spring has yet to be felt.
Gross, who co-founded Pimco and managed the fixed-income giant’s flagship bond fund, also sounded the alarm about short-term Treasury bonds offering higher yields than long-term ones.
“A prosperous economy based on finance cannot achieve good results if low-risk investments yield more than high-risk investments,” he said. “This is just a skewed yield curve and it won’t work well for the economy going forward.”
“We will return to the proper valuation of bonds and long-term bonds,” he added.
Gross too and expect The economy will slow after receiving a huge boost from historic amounts of fiscal stimulus in recent years.
“Once that runs out, we will start to see a 2% real rate impact on consumers and future consumption, and therefore real GDP and therefore inflation will drop by about 3%,” he said.
Gross, who retired in 2019 to focus on managing his personal wealth and his private foundation, warned that regional banks could face more problems after Silicon Valley bank failure this spring. The value of lenders’ bond portfolios plummeted after the Federal Reserve raised interest rates, which spooked depositors and sent many banks running.
Smaller banks may have lowered their duration risk since then, Gross said, “but if they haven’t, there could be problems.”
Read the original article at Business interested