Bond investor Bill Gross warned on Thursday that investors should not be tempted into buying high-flying equities and corporate bonds, given the possibility that U.S. President Donald Trump might fail to enact policies that fuel economic growth.
Wall Street's main indexes have rallied since Trump was elected president and remain close to all-time highs, driven by optimism that his policies may stimulate growth in various industries and push share prices even higher.
"Don’t be allured by the Trump mirage of 3-4 percent growth and the magical benefits of tax cuts and deregulation," Gross said in his latest Investment Outlook, which is released during the first week of every month.
"The U.S. and indeed the global economy is walking a fine line due to increasing leverage and the potential for too high (or too low) interest rates to wreak havoc on an increasingly stressed financial system. Be more concerned about the return of your money than the return on your money in 2017 and beyond."
Gross, who runs the Janus Global Unconstrained Bond Fund, characterized the run-up as the "Trump bull market and the current 'animal spirits' that encourage risk."
Details on Trump's plans remain scarce, however, and equity gains have moderated on growing concerns that stock valuations may be high.
The S&P 500 is trading at about 18 times forward earnings estimates against the long-term average of about 15 times, according to Thomson Reuters data.
Gross said the global economy has created more credit relative to GDP than that at the beginning of 2008’s great credit recession.
"In the U.S., credit of $65 trillion is roughly 350 percent of annual GDP and the ratio is rising," Gross said.
"In China, the ratio has more than doubled in the past decade to nearly 300 percent. Since 2007, China has added $24 trillion worth of debt to its collective balance sheet. Over the same period, the U.S. and Europe only added $12 trillion each."