Financial whiz Bill Gross — AKA “The Bond King” — is reminding people that the Dow Jones record highs are not the only thing that they should be paying attention to. They should not forget that the bond market is also important and look to see if it will break the 2.6% mark.
The 72 year old investor is reportedly worth more than $2 billion and co-founded Pacific Investment Management and is a fund manager at Janus Capital Group. His forecast was delivered on Tuesday through his monthly investor report for Janus.
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Once the Dow Jones breaks 20, 000, it will be the new benchmark and staying above it will be the indicator for a healthy economy. And to think, when the Twentieth Century came to a close just 17 years ago the benchmark was only 10, 000. So why do people care so much about the Dow Jones anyway?
Well, it represents the value of the stocks of the biggest and most important companies which the people at the Dow think best indicate the total health of the New York Stock Exchange. So if the Dow hits 20, 000, then that would mean that the average share of these companies is now $20, 000, or a total of about $20 trillion in wealth.
https://twitter.com/CNBC/status/818818133918150657
This is obviously far from a perfect system for keeping track of the real total value of the NYSE and many argue that other indexes, such as the S&P, are better indicators of the market’s total value. But both the Dow and The S&P are either up or down at the same time.
So why should the average American care so much about this since they either do not own stock, or own stock only in certain companies? Well today many people invest in mutual funds, or have their pensions tied up in pension funds which invest in mutuals, and so the value of the stock market affects the value of their retirement nest eggs. Also, when stocks are up, it is seen as a statement by investors that they have confidence in the economy as a whole and in the individual companies ability to make money and thereby pay their stockholders dividends.
But they forget that stocks and bonds are negatively correlated; when one goes up, the other goes down. Why? Because when the Federal Reserve, or the central banks in England and the Euro zone, raise their lending rates it makes the bond markets more attractive to investors than stock markets. If interest rates go up, it costs more for businesses to borrow money either directly from banks or by issuing bonds themselves which slows their growth. And since both government and corporate bonds then offer higher yields and are safer bets, people take money out of the stock market and move it into bonds, causing the value of stocks to fall.
https://twitter.com/JanusCapital/status/819205634784534529
OK, so now if you are still with us then you want to know what Bill Gross said that was so important. Well he said that in 2017 people should look for bonds to offer a 2.6% rate in a 10-year U.S. Treasury yield. In other words, if that happens then people could expect at least a 2.6% annual return on a 10 year bond. Now ask yourself if you are getting that much compounded interest annually from your savings account. Over ten years, compounded annually, you would get almost 30% in total interest.
And remember, it is a lot safer investment than in stocks which can plummet at any time. Remember what happened to the markets in 2000 when the dot com bubble burst and in 2008 when the sub prime mortgage debacle broke? Well people who had all their money in on of those special closed retirement accounts or in government bonds lost nothing while the people who had everything in stocks lost their shirts.
Its like they always say, “the higher the return, the higher the risk.”
Since 2000, the Fed has kept rates low to avoid recession and keep the economy moving. Since the start of the “Great Recession” there was no chance of interest rate hikes. But now everyone expects that there will be. You can read here what Bill Gross said, that is if are not afraid that it will give you a headache.
“Now, however this super strong, frequently tested downward trend line is at risk of being broken. 2.55% to 2.60% is the current “top” of this trend line, and over the past few weeks it has held and reversed lower by 15 basis points or so, ” wrote Gross.
“BUT———-. And this is my only forecast for the 10-year in 2017. If 2.60% is broken on the upside – if yields move higher than 2.60% – a secular bear bond market has begun. Watch the 2.6% level. Much more important than Dow 20, 000. Much more important than $60-a-barrel oil. Much more important that the Dollar/Euro parity at 1.00. It is the key to interest rate levels and perhaps stock price levels in 2017.”
