(MoneyWatch) PIMCO's legendary bond manager, Bill Gross, is arguably the best bond manager alive. But best doesn't mean he's always right. Take, for instance, that CNN Money reports Gross is now warning to "be very afraid of markets." Should you be afraid? Well before you decide to bail on stocks, let's consider his last two major predictions.
In February 2011, Bill Gross made a big bet against U.S. Treasuries by selling all within the giant PTTRX bond fund and even using derivatives to bet against them. U.S. Treasuries were among the best performing assets of 2011, even with the S&P downgrade. The PTTRX fund badly lagged that year.
In 2012, Gross warned investors to exit out of stocks saying stocks were for suckers. He went on to rather poetically say:
The cult of equity is dying. Like a once bright green aspen turning to subtle shades of yellow then red in the Colorado fall, investors' impressions of "stocks for the long run" or any run have mellowed as well.
Gross specifically singled out "Euroland" as the place to avoid. Last year both U.S. and International stocks surged, with the strongest performing part of the world being Europe, rising 21.55 percent and besting emerging markets, the Pacific Rim and the U.S. The dying equities prediction was a bit exaggerated. Though that may have been a good thing for PIMCO, as they launched an equities division in spite of the strong warning from Gross.
This time, I think Gross may be partially right in his recommendations when you read beyond the headline of being afraid. Gross states "Investors should be prepared to accept lower returns on bonds, stocks, real estate and derivative strategies." He notes that one should avoid long-term bonds as the risk is greater than the reward. Gross suggests buying gold and currencies from countries more fiscally sound than the U.S.
Unlike the prior predictions of absolutely avoiding U.S. Treasuries or stocks all together, this time Gross is at least hedging his bet and not saying to avoid equities completely. U.S. stocks are at an all-time high as measured by the total return of the Wilshire 5000, and up a staggering 147.7 percent from the post-crash bottom on March 9, 2009. Of course these stellar returns can't continue indefinitely.
And I think he is right on bonds as well. As yields declined, bonds surged. But the five year Treasury is yielding 0.88 percent and rates don't have much more to fall unless they turn negative. I too am avoiding long-term bonds.
In my view, a consistent strategy with rebalancing works much better than following a big bet. This is true even if the advice is coming from a legendary manager.