Sit out the dance, Gross tells investors
BILL Gross, who in January predicted that many asset classes would end the year lower, said US equities have another 10% to fall and investors should sit out the current volatility in cash.
The whipsaw market reaction to the lacklustre US jobs report last week showed that markets, especially stocks, high-yield bonds and some emerging market debt, were trading like a casino, Mr Gross said on Friday. He was speaking from a cruise ship which had taken shelter near New York City amid stormy weather over the Atlantic.
Mr Gross, who earlier made prescient calls on German bunds and Chinese equities, said US stocks would drop another 10% because economic conditions did not support a rally such as that in 2013, when corporate profits went up. Today they were flatlining and low commodity prices were hurting energy companies, said the manager of the $1.4bn Janus Global Unconstrained Bond Fund.
“More negative numbers lie ahead and if you define a bear market by a 20% correction, at some point — that’s six to 12 months — we’ll have a classic definition of a bear market, meaning another 10% downside,” he said.
Just as New York City was the safe harbour for Hurricane Joaquin, he said, cash was the best bet until investors got a better view of what the Federal Reserve and the economy were going to do.
“Cash doesn’t yield anything but it doesn’t lose anything,’’ so sitting it out and making 25 to 50 basis points in commercial paper compared to 4% to 5% in risk assets was not that much of a penalty, Mr Gross said.
“Investors need cold water splashed on their face and to sit out the dance.”
The odds of a Fed lift-off this month fell to about 10%, according to futures traders, after US reports showed the pace of hiring slowed last month and wage growth stalled. Low wages and slowing employment put a drag on retail sales and the economy, said Mr Gross. While the Fed needed to lift rates from zero to fix distortions in the market that policy had created, it was now constrained from doing so, he said.
Mr Gross has been betting Treasuries will trade within a certain range, capped by deflationary forces, such as debt, demographics or commodities, supported on the lower side by central banks and money creation. He has recommended this strategy before, and is widening the outer bounds of his targeted range. He also recommends buying a chunk of volatility within that range.
“The execution, like we saw with the China trade and the bund trade, is the critical component, and when you buy those straddles obviously you’ve got to know when to take them off too. It gets tricky. And there’s no doubt the market is very illiquid.’’
Mr Gross recommended shorting the Shenzhen Composite index in June, right before it plunged, but he did not directly do the trade. Instead he put on Standard & Poor’s 500 index shorts and other indirect bets.
In April, he recommended the “short of a lifetime” against the German bund; he later said his forecast was “well-timed but not necessarily well-executed” as he had bet on a trading range and volatility pushed prices outside of those levels.
Now, stocks may rally despite his take. “That’s not to say stock markets don’t defy logic — they do,” he said. “But I wouldn’t be on that train, put it that way.”