‘T-bill and chill’ strategy challenges stock investors

Stay informed with free updates

Simply sign up to the The Long View myFT Digest — delivered directly to your inbox.

Jeffrey Gundlach, one of the biggest names in the bond world, is feeling sorry for “poor” stock investors. Bondholders may have been absolutely hammered over the past two years as interest rates have risen. But the founder of DoubleLine Capital warned that equity investors were still “living for the Magnificent Seven” — in effect making a risky bet in riding the wave of big tech stars.

With six-month Treasury bills offering an annualised yield of 5.58 per cent, the founder of DoubleLine Capital highlighted the popularity of a “T-bill and chill” strategy. That is, simply parking money there and sitting back. 

“It’s [now] exciting to be a bond investor,” he told the annual gathering of bear-inclined investors, organised by Grant’s Interest Rate Observer in New York this week. “You can get 9 per cent in bank loans. You can get 7.5 per cent from floating rate triple-A assets in parts of the securitised market that will not have any defaults.” 

Few have so far felt pity for the holders of Microsoft, Apple, Amazon, Google-parent Alphabet, Tesla, Facebook-parent Meta, and Nvidia, which have seen gains this year ranging from about 35 per cent (Apple and Microsoft) and more than 200 per cent (Nvidia). In the nine months to the end of September, a basket of the seven had risen just over 50 per cent, according to Goldman Sachs. Without them, the S&P 500’s rise of 14 per cent at that point shrank to a miserly 4 per cent. 

Predicting an end to investors’ obsession with the Magnificent Seven has so far embarrassed far more people than it has enriched. And with such easy crowd-following gains, it has been hard for sceptics to bother stockpicking among the other 493 index members — let alone consider searching for standouts among smaller companies. The small-cap benchmark, the Russell 2000, has fallen 2 per cent this year. 

Gundlach’s joke at the expense of equity investors does highlight one important fact, however: there are alternatives to stocks now. Admittedly, the predictability of collecting regular interest payments, however juicy compared with recent memory, isn’t likely to excite a shoot-for-the-moon stock investor.

But even a few months of more investors “chilling” in T-bills, perhaps waiting for a cheaper entry point for stocks or waiting to see what the Federal Reserve does next, would cut the amount available for riskier equity bets. And for momentum-reliant trades such as buying pricey companies which have already rallied hard, that can be a problem.

There’s also the question of how many investors there are left to buy the seven. Even the least-favoured of the group (Tesla) is already held by more than a third of active long-only funds, Bank of America strategists reported this week, while those same funds are overweight another five of the seven, relative to the index.

All except Microsoft have seen more funds invest this year and with 85 per cent of active funds holding the backer of ChatGPT, there really aren’t many left to jump in. BofA’s report put it bluntly: there are “fewer funds left to buy (the) biggest stocks”.

The seven make up a remarkable 28 per cent of the market capitalisation of the S&P 500. The top 50 stocks account for 57 per cent. Concentration on this scale is extremely rare. There are just two other occasions — July 1932 and November 2000 — in the past 100 years where the biggest 50 stocks have made up so much of overall US market value, according to Absolute Strategy Research.  

Unhelpfully for fans of history repeating itself, there are no real conclusions to be drawn on that; 1932 marked a bottom in the S&P 500 while 2000 came just after a peak. 

ASR co-founder Ian Harnett views this year’s stock market performances as an end-of-cycle moment showing investors have been prepared to drop caution in favour of chasing more of the same — that is, the tech growth theme that has dominated in recent years, however hard it is to justify the valuations.

“Even if you think these companies are going to be structurally brilliant for a long time, you have to remember that the people they are trying to sell things to, still face cyclical economic pressures,” he says.

While the seven have dominated market discussion, their returns aren’t quite as sparkly if you change the investing period. Over the past three months for example, just Nvidia, Facebook and Alphabet have risen. Over two years, four of the seven are flat or have actually lost money for their shareholders.  

Deeann Griebel, a Mesa, Arizona-based financial adviser, says her clients are already starting to think again. “Since they’re not making easy money any more they’re willing to listen to other ideas.”

Time to return to stockpicking again? Harnett points out that nimble bargain hunters could have done better than the headlines suggest. Japanese value stocks, for instance, have risen 26 per cent this year — but their US equivalents have gained only 4 per cent.

“It has actually been a stockpicker’s year with different strategies performing depending on the market,” he says. “It’s just that to outperform with your picks, you’ve had to absolutely shoot the lights out.”

jennifer.hughes@ft.com