Bill Gross’ warning
Bill Gross’ investment outlook for April includes a warning: “Equity markets are priced for too much hope, high yield bond markets for too much growth, and all asset prices elevated to artificial levels.”
While shedding light on how growth is productivity dependent, Gross reiterated his points about:
- The global economy is stuck in a low-growth environment, that is a ‘new normal’ according to Gross, and
- That a 3% real GDP growth rate as envisaged by the Trump administration seems far-fetched, as the productivity and investment level required to drive the economy to that level of growth is missing. Moreover, 3% GDP growth could trigger a bear bond market according to Gross.
Most asset prices elevated to artificial levels
In the current market environment, Gross sees most asset prices elevated to artificial levels. Equity market (SPY) (IWM) (QQQ) valuations are far too expensive, and the high-yield bond market (HYG) (JNK) is pricing in a superficial and most likely unachievable rate of growth in investment (that is, the discount rate).
The benchmark S&P 500 tracking SPDR S&P 500 ETF (SPY) is up by about 10% over the last 6 months, while the Vanguard Total Bond Market ETF (BND) is down 2.2% over the same period. High-yield debt, as tracked by the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) is up 0.32%, while the investment –grade debt-tracking iShares iBoxx USD Investment Grade Corporate Bond ETF (LQD) is down 2.6%. This just shows how investors have got extremely positive with respect to growth in the US economy.
High rates of growth are like memories from a bygone era
Bond market should understand and need to take into account growth rates that are more realistic. “High rates of growth and the productivity that drives it are likely distant memories from a bygone era,” said Gross in his outlook.