DoubleLine Capital CEO and Chief Investment Officer Jeffrey Gundlach says the effects of low oil prices will “ripple through the U.S. economy” in 2015 and could have a “sinister” impact on jobs and spending.
“Thirty-five percent of the S&P 500’s [capital expenditure] is energy,” Gundlach explained during a webcast Tuesday. “If we stay as we are, capex will likely fall to zero” in that sector.
In other words, the fixed income expert stressed, the economy could likely see “a true collapse in capital expenditures and certainly a collapse in hiring … in certain regions of the country” if the price of oil stays at its current level of $45 a barrel oil or lower.
“All of the job growth” since 2007, Gundlach added, “can really be attributed to the shale oil fracking situation and the energy renaissance. Other than in regions like Texas and North Dakota, “We have not added any jobs.”
With oil at or around $45, “We clearly are going to see some leveraged energy companies go bankrupt. When there are huge shocks to the system … [it] usually leads to a rippling effect,” he explained.
On the positive side, Gundlach noted, low oil prices are generally seen as a way to boost GDP by about 0.7%. “The consumer gets more money in the pocket … buy more burritos or something, or save up and buy another car,” he said.
(On Wednesday, West Texas Intermediate for February delivery rose slightly to trade near $46 a barrel, after slipping to about $45.90 on Tuesday, which was its lowest close since April 2009.)
While the fixed-income expert sees U.S. equities as a safer bet than their counterparts in many other regions of the world, he notes they are “starting to get a little bit extended.”
“They can outperform, but it’s almost impossible for the great gains from June of 2014 to be repeated,” Gundlach explained. “They’ve got to decelerate.”
While investors “can always say this time is different,” Gundlach shared several arguments that make for a bearish scenario. “Equities have never risen for seven years in a row,” Gundlach said.