Bill Gross cofounded one of the world’s largest investment firms, Pacific Investment Management Co. (Pimco) in 1971, but he’s perhaps best known for a title Fortune gave him decades later: “the Bond King.”
From 1987 to 2014, Gross ran Pimco’s Total Return Bond Fund, which was, for many years, the world’s largest fixed income fund, boasting nearly $500 billion in assets by 2013. As the New York Times said in a 2001 article, Gross, at least for a time, was undeniably “the nation’s most prominent bond investor.” By the late 2000s, Gross’s standing as a bond guru was so cemented on Wall Street that he was even asked to advise the Treasury on the role of subprime mortgage bonds in the 2008 Global Financial Crisis.
But Gross stepped away from asset management in 2019, and he’s not making hay with bonds anymore. “I like dabbling in the equity market more than bonds,” he told Bloomberg on Monday.
This shouldn’t be a surprise to a close observer, since the Wall Street veteran warned last September on an episode of the Odd Lots podcast that the multi-decade bond bull market that helped him craft his legacy is now over.
“I was supposedly the Bond King. And that was good because it sold tickets. But I never really believed it,” Gross said, arguing his success was a function of a great team and “a bond bull market for 30 years that was growing.” Here’s why the action is in stocks now, according to the Bond King himself.
The end of the bond bull market
When Gross was running Pimco’s Total Return Bond Fund, he benefited from decades of falling interest rates that not only tamed inflation—they allowed bond prices to surge.
In October 1981, with the Federal Reserve locked in a battle against rampant inflation, interest rates spiked to a peak of nearly 19%. But in the decades since, there’s been a steady, if nonlinear, decline in interest rates, culminating in a period of near-zero rates after the Global Financial Crisis and again during the pandemic. The Federal Reserve itself calls this period “the Great Moderation.”
Since bond prices rise when interest rates fall, bonds offered attractive returns during the Great Moderation. But over the past two years, with the Fed raising rates to fight inflation, the bond market has suffered. In fact, 2022 was the worst year in the bond market’s history, dating back more than 250 years. Vanguard’s total bond index sank 13% in 2022, and while it recovered 5% in 2023 on the prospect of falling rates this year, that rise paled in comparison to the stock market’s 24% gain.
Now, most experts believe interest rates are set to fall in 2024, which should support bond prices in the near term. But Gross warned in a September investment outlook article that he believes bonds are headed for another “year of losses.” Interest rates may fall, but not enough to cause Treasury yields, the true mover and shaker of the bond world, to drop significantly. That means the bond bull market that lent Gross his “Bond King” title is over.
Stocks still aren’t cheap
Gross clearly believes bonds might not offer the best opportunity for investors in 2024, but on Monday, he warned that stocks aren’t cheap, either. The Wall Street veteran noted that price/earnings ratios (P/Es)—a common valuation metric—are still elevated given the current level of interest rates. “A P/E of 19 times is much too high,” he explained. “I think ultimately … P/E ratios have to get more in balance with real interest rates which are relatively high now,” he argued, referencing the so-called real interest rate that bondholders receive, which takes inflation into account.
Gross also warned that there is “political risk domestically” for stocks given the election year, and “geopolitical risk” abroad owing to the wars in Ukraine and Gaza. “So what do you do? Typically you remain really cautious,” he said.
Still, the veteran investor argued that there are a few opportunities in the equity market, especially in companies that offer “relatively safe dividends.”
“I’m not suggesting [you] get out of the market, I’m suggesting that perhaps you should be a little more conservative. But you need to be invested,” he told Bloomberg Monday.
Gross cited master limited partnerships (MLPs) that operate oil and natural gas pipelines as one attractive area of the market that offers sizable dividend yields “with a tax deferred type of status.” He noted that the oil and gas giant Sunoco also offered to buy the MLP NuStar for a 10% to 15% premium this week, which is a sign that other MLPs could be acquisition targets.
“With yields at 8% to 9%, and this type of value and attraction from other companies that are in the takeover type of business, I think that’s one clear example of what you should be buying relative to the Magnificent Seven,” he said.
