Unlike some investment strategists, DoubleLine CEO and Chief Investment Officer Jeffrey Gundlach is not optimistic about stocks.
In fact, the Standard & Poor’s 500 Index has about 2% upside and 20% downside, he told investors on a conference call late Tuesday.
This is “a lousy risk-reward trade-off,” Gundlach says, adding that equities are a “big losing proposition.”
During the webcast, he also remarked that he views the current rebound as a “bear market rally.”
Others disagree. In fact, they see it as an indicator that we are on a continuing bull run.
Speaking about equities ahead of the bull market’s seven-year anniversary on Bloomberg Radio, Liz Ann Sonders said: “This pervasive pessimism, skepticism and unwillingness to invest in equities anywhere near the degree we’ve seen in past bull markets has been a very unique characteristic.”
In fact, such bullish views represent “the wall of worry that stocks like to climb,” she said.
Read on to see the 10 reasons that Gundlach disagrees.
1 . Connect the Dots
That’s what the DoubleLine chief likes to do on his quarterly investor calls.
While he echoed several themes from earlier presentations, the bond specialist zoomed in on several conclusions about where the stock and bond markets are in headed March.
Core inflation is rising, but it excludes food, energy and rents. And certainly, he points out, commodity prices are not trending significantly higher – and some continue to decline.
“If various measures of inflation are going up but commodity prices remain in the basement, how is that supposed to be good for companies” in the materials and energy complex?
This is an important reason to fear talk of continuing bull run.
Plus, the current political cycle is impacting volatility, as well.
2. Low Commodity Prices
While some market analysts see the current rally as part of a bullish trend, Gundlach is more concerned with where commodities are priced.
“It’s clear that stock markets fear deflation,” Gundlach said. He adds that oil has rallied recently, but it “is still too low.”
In fact, as he said at several points during his talk Tuesday, “Time is on your side.”
In other words, there is still plenty of time to wait for commodities to cheapen further before buying them.
The Bloomberg Commodity Index, for instance, is now at about 78, below where it was in 2000 (when it hovered near 100), and way off of its level of roughly 240 in 2008.
Meanwhile, the Dow Jones UBS Commodity Index is down about 25% from where it was in early March 2015.
3. Weak Corporate Profits
“How can earnings rise when wages are going up and the topline [growth] is no going anywhere?” Gundlach asked, emphatically.
According to DoubleLine’s analysis of both corporate profits and recessions since 1973, 1985 “was the only period when a 60 basis-point decline did not coincide with or predict a recession.”
A chart shared by Gundlach during Tuesday’s talk shows a drop in corporate profits staring at least 12 months ago.
Other profit declines took place in the mid-’70s, late-’70s, early-’80s, late-’80s and early-’90s, early 2000s and during the financial crisis.
“Profit margins peaked [earlier] and have fallen” recently, Gundlach said. “They will fall further with wages growing.”
U.S. GDP growth is currently at 2.2%, he adds.
4. A Weak Global Economy
World Bank estimates for global growth this year are now at 2.9% vs. the earlier 3.3% estimate.
“But I want to point out … specifically China’s baked-in rate of 7% [growth] in the forecasts,” Gundlach explained.
That is a very generous figure, he says: “You can look at the data from there … [complicated by] debt issues, low commodity prices worldwide … and it’s extremely clear that Chinese growth is not at 7 %.”
In fact, Gundlach stated, “It may be contracting. The data is a bit non-credible.”
China represents about 16% of the global economy.
“If we say China is at zero percent growth – with them representing 16% of the global economy – that means a takedown of growth by 1% or so for global GDP. And we could be at 2% or lower with China underperforming,” he explained.
Gundlach shared a chart that looks at the five-day moving average of China’s exports and imports, which are down 6% and 15%, respectively, vs. March 2015.
5. A Weak Chinese Stock Market
The Shanghai Composite is trading below 2,900.