U.S. Markets

Gross says equity markets, junk bonds pricing in 'too much' hope, growth

NEW YORK (Reuters) - Influential bond investor Bill Gross on Thursday stepped up his warning to investors not to be tempted into buying equities, high-yield junk bonds and other asset classes, given the possibility that U.S. President Donald Trump might fail to enact policies that fuel economic growth.

“Equity markets are priced for too much hope, high-yield junk bond markets for too much growth, and all asset prices elevated to artificial levels that only a model-driven, historically-biased investor would believe could lead to returns resembling the past six years, or the decades predating Lehman,” Gross said in his latest Investment Outlook. “High rates of growth, and the productivity that drives it, are likely distant memories from a bygone era.”

Gross, who runs the Janus Global Unconstrained Bond Fund, earlier this year said investors should not be allured by the “Trump mirage,” of 3-4 percent economic growth and the “magical benefits” of tax cuts combined with deregulation.

Trump told the Fox Business network this week that he wants to tackle the healthcare issue before tax reform. “I have to do healthcare first, I want to do it first to really do it right,” Trump said.

Trump said that although tax reform is critical to growth and businesses large and small, “hundreds and hundreds of millions of dollars” would be saved by repealing and replacing Obamacare, which would help with tax reform.

Gross said U.S. stock and corporate debt markets have rallied on expectations that tax reform would get done sooner rather than later.

“Can the Trump agenda re-create 3 percent growth?” Gross asked in his April report to clients. “Well now, that is the investment question of the hour/day/decade and its conclusion, unlike romance on a desert island, will determine the level of asset prices across the investment spectrum.”

Growth is productivity dependent, Gross said, noting that Northwestern University economist Robert Gordon has long argued that lower productivity may now be a function of having picked all of the “low-hanging fruit,” such as electrification and other gains from 20th century technology.

“Then there is the obvious connection between recent years’ low levels of private sector investment, which perhaps begs another question as to why that is so low,” Gross said.

“Optimists claim that the future benefit of smartphones and medical technology have yet to have an impact and that eventually - much like the introduction of the automobile - they will lead to a resumption of historical trends.”

Reporting by Jennifer Ablan, editing by G Crosse