PIMCO bond manager Bill Gross is reassuring investors roiled by last week’s choppy markets that stocks and bonds are oversold and investors should stay the course.
In his new monthly investment outlook for July filled with nautical metaphors, the manager of the world’s largest bond fund says the yields reached on bonds in late April plumbed historic depths and needed correction, but the reaction to Federal Reserve Chairman Ben Bernanke’s tapering comments went overboard.
As co-captain of the Newport Beach, Calif.-based investment company, Gross watched as investors bailed out of his own Total Return Bond Fund last week, its value sinking more than most of its bond-fund mates.
Perhaps that brush with fate got Gross, a former Navy lieutenant, to reflect on a near disaster that occurred when his ship came within one degree of heeling in the South China Sea. Gross and his fellow crewman survived, prompting the former chief engineer to advise investors on how to abandon ship when necessary but also on how to avoid panic and right the ship when indicated.
The U.S. economy is not sinking, Gross says. What happened last week was that investors reacted to a ship that was “top-heavy with too little ballast” because the Fed had “tilted overrisked investors to one side of an overloaded and overlevered boat.”
But Captain Gross says it would be a mistake for investors to jump overboard into “the cold money-market Atlantic Ocean at near zero degrees,” alluding to the Fed’s low policy rates.
That is because, far from the overreaction to Fed tapering of bond purchases, the central bank has consistently stated its 25 basis point federal funds rate will last beyond the end of QE, and “even then subject to a consistently strong economy that produces 2%+ inflation,” which Gross considers unlikely this decade.