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Gundlach: Get Ready for Higher Yields, Summer Selloff

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Things could heat up in the stock market this summer when rates may go higher, according to DoubleLine Capital CEO Jeffrey Gundlach.

“I think it’s more likely that equities drop when yields are rising,” Gundlach said, during a webinar on Tuesday.

The fixed-income portfolio manager see yields on the 10-year Treasury going up this summer, and a significant move would go hand in hand with a correction in equities.

On Wednesday, the Federal Reserve said rates would not go up due to concerns about economic growth. The yield of the 10-year note moved up to 2.30%.

With his anticipation of higher yields this year in general, “I would prefer not to take a lot of interest rate risk now,” Gundlach said. In other words, it’s not the time to be “a big fan of long-duration” securities, which he explained he was not.

“I think it’s wrong to characterize the environment [today] as a ‘flight to safety,’” he explained, pointing out that volatility has been low and the rally in Treasury bonds weak.

Gundlach described the movement in stocks today as “sideways.”

He also reviewed some of the economic data that is showing a softening in demand, such as weaker auto sales and retail consumption.

With GDP growth at 0.7% in the first three months of 2017, “We had another lousy first quarter,” the DoubleLine executive said.

While the first estimate for Q2’17 is “a staggering 4.3% in real [terms], and it could be 6% nominal,” he explained. “But this often gets downgraded, such as it being in the high-twos and then [ending up at] 0.7 in the first quarter.”

Trump Troubles

“You have to wonder” where things in Washington are going, Gundlach said. “The rollout of legislation seems to be getting slower and slower and the pushback bigger.”

President Donald Trump’s recent remark on Twitter, “Our country needs a good ‘shutdown’ in September to fix mess!” led the DoubleLine executive to quip: “It doesn’t sound like Congress and the White House are cooperating.”

As for Trump’s proposed tax cuts, they are “going be harder than first thought [to pass], and they are not coming as early as the market hoped,” he said.

With the president speaking out against a strong dollar and other factors, Gundlach sees the U.S. dollar in a weakening stage.

As for gold, there could be “another leg up” in prices. “It is not a time to give up on gold,” he said.

Discussing oil prices, Gundlach described the reason he is bearish: technology that lowers the costs of extraction for energy and other commodities. “Commodities broadly should underperform [the Consumer Price Index],” he said.

— Check out Gundlach: Fed to Raise Rates ‘Until Something Breaks’ on ThinkAdvisor.