DoubleLine Capital CEO Jeffrey Gundlach walked investors through many trends likely to affect the markets this year and beyond in Tuesday’s “Just Markets” webcast. And while the Bond King put special emphasis on rising U.S. government debt, he also gave his thoughts on next month’s Super Bowl.
The stock market is “pricing in [the fact] that leading economic indicators have dropped,” but it has not priced in “the possibility of a recession,” Gundlach said.
There are multiple indicators of a possible recession “flashing yellow right now,” he says, such as spreads in the high-yield, or junk, bond market; though this signal could be “a false positive,” it is worth watching.
“Use the strength of junk bonds as a gift and get out of them,” Gundlach said. He equated the bounce of junk bonds today to that of the credit markets before the 2008 financial crisis.
“There’s potential for that here,” he said, “because the panic in December was a buying panic, not a selling panic. You never saw the VIX truly spike the way you want for a panic. You want to see that thing over 40. It never made it to 40.”
He also pointed out that by historic standards, over 55% of triple-B-rated bonds “should be considered junk status right now, but are not.”
Investors should expect a lot of up and down movement this year, Gundlach argues, as the Federal Reserve tries to raise rates but not at the expense of stocks, creating a “tug of war” between stocks and bonds.
Fed Chairman Jerome Powell has gone from “pragmatic Powell to Powell put, and the markets have been throwing a party since then,” Gundlach said. Still, rising bond yield will likely effect stocks on the downside at some point this year.
Investors, he suggests, should turn to companies with strong balance sheets: “That’s going to be the way to survive the zigzags in 2019.”
Gundlach sees emerging-market stocks as preferable to the S&P “relativistically,” in particular if the U.S. dollar weakens. He also cautions that investors should avoid “the value trap” of European equities.
“There’s plenty of room for Fed rhetoric [about tightening] to soften up and that would weaken the dollar,” Gundlach said. “I would not be surprised to see it us go to 94″ on the U.S. Dollar Index (DXY), which is trading today at 95.3.
“Gold is not doing great,” he explained. But as the U.S. dollar weakens, it “usually appreciates in dollar terms.”
As for commodities overall, the group “usually moves up before a recession, but I am less convicted” about this situation today, Gundlach says. The traditional movement of commodities right now may be “overwhelmed by other variables.”
He sees the odds of commodities “making money in 2019 as greater than 50%,” adding “let’s wait and see.”
Gundlach, who said Bitcoin would decline in 2018, now predicts the cryptocurrency as rising to $5,000. Investing in it, however, “is not for the faint of heart.”
A long-term trend that can impact the dollar is the “horrific” outlook for U.S. government debt, according to Gundlach.
U.S. government borrowing, he says, is akin to the average American “maxing out three $5,000 credit cards.”
For instance, interest costs on government debt as a percentage of GDP are projected to hit 2.5% by 2020 and 3.0% by 2030, according the Congressional Budget Office. Also, total public debt surged to $1.36 trillion in 2018 from $516 billion in 2017.
As debt and its costs expand as a percent of U.S. GDP, Gundlach asked, “Are we really growing at all, or is it just debt-based?”
Turning to sports, the portfolio manager says he’s disappointed the Buffalo Bills did not make the NFL playoffs and is looking to the New Orleans Saints to win the championship.
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