Investors need to watch only one number in 2017 to figure out what returns are going to look like across the various markets, bond guru Bill Gross said Tuesday.
Whether the 10-year Treasury yield crosses the 2.6 percent mark will be critical both to the bond market and to stock prices, the fund manager at Janus Capital wrote in his monthly report for clients. The yield was around 2.39 percent Tuesday morning. Higher yields reduce a bond's face value.
"If 2.6 percent is broken on the upside ... a secular bear bond market has begun," Gross said. "Watch the 2.6 percent level. Much more important than Dow 20,000. Much more important than $60-a-barrel oil. Much more important than dollar/euro parity at 1.00. It is the key to interest rate levels and perhaps stock prices in 2017."
Gross said the 10-year yield has been in a downward trend line since 1987. If that channel is broken, look out.
"Investment happiness and/or despair may lie ahead over the next 12 months depending on it," he said.
Bond yields have risen steadily since bottoming in early July. The gains have been driven by a number of factors, most recently on the expectations that President-elect Donald Trump's policies will drive economic growth and inflation.
The Federal Reserve also projects two or three rate hikes this year, another factor pushing the benchmark yield higher.
The 10-year actually did cross 2.6 percent briefly, on Dec. 15, but has since pulled back as the postelection stock market rally has lost some steam and markets generally have gone into a lull.
Though Gross worries over rates rising, he is skeptical that economic growth under Trump will meet the most optimistic projections. Deutsche Bank recently predicted that the pace of economic growth could double under Trump, but Gross has his doubts.
He believes the "new normal" theory still applies — a low-growth universe where returns will be muted. He helped develop the theory with Mohamed El-Erian while the two ran bond giant Pimco.
"Trump's policies may grant a temporary acceleration over the next few years, but a 2 percent longer term standard is likely in place that will stunt corporate profit growth and slow down risk asset appreciation," Gross said.
In August, Gross used his monthly letter to warn investors against both stocks and bonds and told them instead to focus on real assets like gold and real estate.
Since then, the has risen 4.8 percent, gold is down 13.6 percent and the exchange-traded fund, a fixed income proxy, has declined 3.5 percent.