Bill Gross Is On the Alert as Momentum Mania Sweeps Wall Street

(Bloomberg) — Bitcoin rallying to the moon, meme stocks surging for no good reason, bearish bets cratering all at once.

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For observers without a sense of Wall Street’s long history, the great market mania of 2024 seems new and dangerous. To Bill Gross, who turned 80 this year, this kind of frenzy at the fringes of American markets has been a fact of life for investors since before he was born.

“Will Rogers is famous for saying: ‘Don’t gamble. Take all your savings and buy some good stock and hold it ‘till it goes up, then sell it. If it don’t go up, don’t buy it,’” the retired Pacific Investment Management co-founder said in an email to Bloomberg Thursday and later in a social-media posting, referring to the gambling spirits sweeping markets.

The aphorism from the late humorist Rogers amounts to a century-old endorsement of momentum investing – a strategy that has worked all year and caught another wind with the re-election of Donald Trump. “I am heeding this herd wave but am wary of circumstances that may slow or end this party,” said Gross, who touts defensive-looking trades including dividend-rich companies and banks.

The risk party raged anew on Friday after data showing the continued vigor of the labor market. The S&P 500 ended the week at fresh records and the Nasdaq 100 is up more than 28% this year. Credit markets continue to validate the good vibes across Corporate America, with borrowing premiums sitting at the lowest in more than two decades.

Along the way, the last-remaining short traders are taking hits. Among 126 ETFs that seek to profit from declines, only 14 are up this year and the average loss is 27%, according to Bloomberg Intelligence. For every single dollar invested in these so-called inverse funds, there’s $11 betting on gains instead across leveraged long ETFs, based on the amount of money tracking those strategies. An index tracking the most-shorted stocks is up some 30% this year alone.

“It’s hard to be bearish on risk right now,” said Cayla Seder, macro multi-asset strategist at State Street. “Liquidity remains abundant, the Fed has started its cutting cycle all while economic data continue to generally surprise on the upside.”

Yet suspicions are only growing that market froth is running rampant thanks to the trend-chasing set. The latest sign: Bitcoin surpassed the once-unimaginable $100,000 mark earlier this week in a broad rally that’s lifting coins across the digital-asset industry and inspiring animal spirits.

Richard Bernstein, who heads the eponymous Richard Bernstein Advisors LLC, says the top seven megacap stocks may look stretched, even if the broader market isn’t. But Bitcoin? Yep, it’s a “bubble on steroids,” he said. “There’s nothing fundamental going on. It’s all about liquidity.”

Bubble or not — the crypto frenzy dovetails with a now all-encompassing risk rally. Unprofitable tech companies are up 20% so far this quarter and junk-bond funds are now on course for a record year of inflows. It’s all lending a fresh boost to wealth creation. The number of millionaire 401(k) accounts at Fidelity Investments hit a record high of 544,000 in the third quarter. The net worth of US households also reached a fresh record in the second quarter of $163.8 trillion, according to data from the Federal Reserve.

The price, as ever, is driving sentiment. US consumers’ confidence in the stock market is at unprecedented levels, according to data by The Conference Board.

Underscoring the sense of investor infallibility, the cost to hedge against around a 10% drop in the S&P 500 has been falling for the past two months. Protecting against a bigger selloff is even less fashionable. The latest sign: one of the few remaining ETFs designed to withstand so-called Black Swan events has filed to liquidate this week, after years of losses.

To Lindsay Rosner, there are plenty of good reasons to be bullish for now — and plenty of good reasons to pay up for insurance along the way.

“We feel tail hedges will continue to play an important role in portfolio management,” said the head of multi-sector fixed income investing at Goldman Sachs Asset Management. “We are short-term constructive on the risk environment as we await clarity on what US policy will be and continue to monitor potential inflation risk to the upside.”

–With assistance from Beth Williams.

(Updates with closing prices)