Stocks, Bonds Feeling Gross

Late Thursday, amid a wicked selloff in Treasuries, legendary bond fund manager Bill Gross of Pimco declared that bonds are now in a bear market. A contrarian might say Gross' bombshell revelation means the Treasury market might just stabilize soon.

If bonds find their range, the mystery is what will stocks do? Only then will it be clear if market participants were just going through an attitude adjustment based on belief in a stronger-than-expected economy, or if investors really believe inflation and rate hikes are necessary.

In the meantime, Gross' words in the late afternoon Thursday helped push the 10-year note down 1 5/32, its yield rising 5.12%, its highest level since July 2006. That, in turn, pushed stocks down sharply, with major averages ending near their lows of the day.

The Dow Jones Industrial Average slumped 1.5%, or 199 points, to close at 13,266.73, while the S&P 500 broke below 1500, down 1.8% to close at 1490.72. The Nasdaq Composite fell 1.8% as well, to close at 2541.38.

All 30 stocks in the Dow ended the day in the red, led by losses of 2% or more by Alcoa(AA Quote), 3M(MMM Quote), and Microsoft(MSFT Quote).

Gross' capitulation on the direction of bond yields follows a change of heart among a handful of the most bearish economists and strategists on Wall Street who had been holding out for Federal Reserve rate cuts. From a contrary indicator perspective, Gross is the pinnacle, though he still believes the Fed will cut rates later this year.

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