Bill Gross, the famed investor who built Pimco into a $2tn asset manager, has warned that US stock and bond markets are set for a tougher time in 2020 as fiscal and monetary stimulus loses its “oomph”.
Both classes of assets have raced higher this year, as US corporate profit margins have largely held on to gains they made after the 2017 tax cut, and as the US Federal Reserve’s renewed commitment to monetary easing gave a big lift to fixed-income markets, flattening yields to record lows.
But Mr Gross, 75, told the Financial Times that gains next year would be much harder to come by, noting that central banks around the world have grown cautious about the effects of persistently low interest rates on personal and institutional savings. Fed chair Jay Powell has cut rates three times since July but has struck more hawkish notes in recent weeks, repeatedly batting down the idea that the Fed would use negative rates as a tool to combat future economic weakness.
Stocks in the US would be “flat to down 10 per cent” in 2020, Mr Gross said, while the yield on the benchmark 10-year Treasury note would end the year at 1.75 per cent, slightly higher than it closed last week.
Mr Gross noted that the stimulative effects of the corporate tax reform had fully worked their way through the system over the past two years. “To retain the 1 per cent boost that it provided to the economy . . . the deficit needs to expand by another $1tn or else the economy expands by 1 per cent less,” he said.
Mr Gross, who turned to investing after serving as a US naval officer, co-founded Pacific Investment Management Co in 1971, attaining cult-like status in investing circles as he attracted hundreds of billions of dollars in assets. His tenure at Pimco ended abruptly and acrimoniously in September 2014, when he was ousted.
Mr Gross then endured a rocky few years of performance at Janus Henderson Group, which he joined in October 2014. He retired earlier this year, but is still widely followed for his views on the global economy and world financial markets. He has a net worth of $1.5bn, according to Forbes. Last month he posted online his first investment outlook since his March retirement, saying that investors should home in on stocks that promise secure dividend payouts, given the tougher economic backdrop.
He expanded on that theme to the FT, saying that his favourite sector for 2020 was natural gas stocks such as Energy Transfer, a Dallas-based pipeline operator, and MPLX, a vehicle formed by Marathon Petroleum. “They have yields of 10-15 per cent and defensive prices, due to 20-30 per cent losses this year,” he said.
He added that the US presidential election should produce “volatile opportunities” in the healthcare sector.
The political environment is “mercurial,” he said, as President Donald Trump “continues [his] schizophrenic day-to-day” routines and the “Democrats waver between centrist and ultra-liberal candidates”.