Stocks have recently paused their bull market, with the S&P 500 slipping 6% in the past month.
The legendary bond investor Bill Gross isn’t looking for the climb to resume anytime soon. The S&P 500 has ascended 11% year to date.
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“A new bull market? Can artificial intelligence and $2 trillion fiscal deficits going forward validate that ‘it’s different this time?’” Gross wrote in a commentary on his website.
“I’m suspicious,” he said. “Unless Federal Reserve Chair Jay Powell and company can significantly lower real 10-year Treasury rates from 2.25%, investors may eventually realize that bonds are a better deal than clearly overvalued stocks headed into an economic slowdown/recession.”
Gross doesn’t believe Powell will be “willing or able to lower short rates significantly in the face of a 3% inflation future.” So, “I’d pass on stocks and bonds in terms of future total returns,” he said.
Gross Does Favor Takeover Targets
The “best bets” for stocks are takeover targets, such as Activision Blizzard (ATVI) -), which has agreed to be purchased by Microsoft, (MSFT) -) Gross said. He said the deal will likely close in about two weeks.
Also, there’s Capri Holdings (CPRI) -), which owns Michael Kors and Versace, and has agreed to be acquired by Tapestry, (TPR) -) which owns Coach. Activision and Capri are generating annualized returns of 10% to 20%, Gross noted.
He also likes oil-and-gas pipeline master limited partnerships, due to their favorable tax treatment for investors. To be sure, MLP prices are “a little toppy, due to oil prices that seem vulnerable to the downside,” he said.
U.S. crude traded at $82.75 Thursday, but some experts think it will fall amid slowing global economic growth.
“In any case, keep your eye on 10-year Treasury rates. They need to come down a lot to validate existing forward price-earnings ratios,” Gross said. “They may not.”
The 10-year Treasury yielded 4.73% Thursday, and the forward P-E multiple for the S&P 500 registered 17.9 last Friday, according to FactSet. That’s below the five-year average of 18.7 but above the 10-year average of 17.5.
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