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Portfolio > Portfolio Construction

Gundlach Sees New Stock Lows, Long-Term Pain Ahead

By Janet Levaux

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Jeffrey Gundlach (Photo: Alex Flynn/Bloomberg)

After a brutal first quarter in which the Dow Jones Industrial Average tanked 23% — the biggest first-quarter drop in its history — and the S&P fell 20%, DoubleLine Capital CEO Jeffrey Gundlach said late Tuesday that the markets’ March 23 lows will not be their worst.

“The low in mid-March — I would bet dollars to donuts that the low is going to be taken out,” he said during a webcast. “Will it happen in the near term? Who knows. I think it might.

“The market has really made it back to a resistance zone, and [it] continues to act somewhat dysfunctionally in my opinion,” Gundlach explained, adding that after it takes out its earlier low, we should “get a more enduring [one].”

Investors could become panicky again at some point in April, he said.

Economic Snapback

Looking at the expectations of some analysts, who see a “V-shaped” U.S. economic recovery in the third quarter following a tough second quarter, Gundlach cautioned that such views are “highly, highly optimistic” and are simply “too much to hope for.”

Likewise, estimates of U.S. GDP for 2020 that aren’t in negative territory are “outrageously improbable,” he said. As for Goldman Sachs’ view that GDP will be down -3.1% for the year, Gundlach said he’ll “take the under.”

“We’re looking at a massive, massive reduction in GDP,” Gundlach explained. The effects of the coronavirus and its related economic fallout, coming on top of the sharp drop in oil prices “will be more far reaching” than are appreciated today, he added.

Goldman Sachs said Tuesday that it expects U.S. GDP to be down 9% in the first quarter of 2020 and 34% in the second, while the unemployment rate could be around 13% or even 15% by midyear.

“It looks like a depression scenario,” the DoubleLine executive said.

Long-Term Pain

Gundlach reminded those on Tuesday’s webcast that the Federal Reserve Bank of St. Louis expected job losses could total 47 million — representing a 32% unemployment rate.

“There is no such thing as a non-essential business to a flower-pot maker,” he explained, adding that most “businesses are highly connected.”

In his view, a return to a strong U.S. economy will require time and sacrifice. “We will get back to a better place, but it’s just not going to bounce back in a V-shape back to January of 2020,” he said.

In fact, the U.S. stock market may resemble that of Japan, Europe and emerging economies, which have not returned to earlier highs for 10 years or more, Gundlach explained.

“It won’t be back to where it was prior for a long time to come — on a real basis,” he said, and bonds aren’t likely to produce “meaningful real returns” for some time.

Furthermore, “We will never get back to normal” as we knew it in January 2020, Gundlach said, although “we will get back to a better place after a period of great sacrifice.”

He defined that as including a return to more manufacturing to make the country more self-sufficient and an economy less focused on services like nail salons and cheap retail.

Other Market Matters

Banks are in “a terrible situation” due to interest rate cuts and yield curve control, Gundlach explained, though he does not believe the federal funds rate will become negative.

He sees government programs to support the financial system and economy as hitting $10 trillion. “All of this stimulus is really negative on the dollar,” he said.

As for “paper gold,” such as gold ETFs and futures, the fixed income specialist warned that there “could be a huge failure in the entire gold delivery system” because there’s not enough physical gold to cover the paper.

“Ultimately, the biggest winner out of all of this [change] may be the American economy once we get past a tough patch,” he said. “It’s been seriously misfunctioning.”

— Related on ThinkAdvisor:

Janet Levaux

@Think_JanetL

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