Doubleline Capital CEO Jeffrey Gundlach sees the probability of the stock market taking out its March 23 low “at 76.8%, to facetiously put a fine point on it,” he said during a webcast late Tuesday.
During his presentation, Gundlach pointed to charts showing that the performance of the S&P 500 index — excluding the largest technology stocks — had been weak over the past five years: “It’s only up about about 12% or something.”
Compared to other global equities, the U.S. equity outperformance without the Super Six — Apple, Alphabet, Amazon, Facebook, Microsoft and Netflix — largely has been tied to tax cuts and other external factors in recent years, he added.
The U.S. stock market “crushed” the rest of the world for the last 11 years “because of the ‘Super Six,’” he explained. Year to date, the S&P 500 excluding these six firms “is not looking very good,” Gundlach added.
One way to look generally at stock results and other indicators is that “they were nothing but an illusion … since the global financial crisis,” Gundlach said. “We have lost all the jobs from the nadir … all the jobs that were created in that huge run … in the recent six-week period.”
Will the job losses be temporary? “Some of it. Will all of it be temporary? Of course not,” he said.
The recent weekly claims for unemployment benefits have shown “an incredible increase that makes the global financial crisis look quaint by comparison,” he added.
Gundlach said “the social mood and civil unrest” can have more than a short-term impact on stocks as “frustration in the society at large” becomes clear.
“People feel there is a lot of wealth inequality, and there’s too much in the way of corporate greed and not enough going to wages,” he explained.
While corporate profits as a percent of GDP peaked some five years ago, at about 13%, “average wages have been in nonstop decline, hitting a low in 2014,” Gundlach said.
Gundlach pointed to a chart showing personal income wage and salary disbursements as a percent of GDP (in U.S. nominal dollars) from the late 1950s through early 2020.
“That could be a problem for the fundamentals of the stock market,” he added, noting that moves to raise corporate taxes also could “take away some underpinnings.”
As investors have jumped into the markets of late, the current rally “is being driven by a lot of rampant speculation,” Gundlach said.
“I thought the S&P at 2,900 was the peak,” he said. “I’m happy to watch others push it higher.”
Looking at the COVID-19 shutdown versus the earlier crisis, “We now have the same interest-rate policies and quantitative easing, [the current size of which] looks trivial in comparison,” Gundlach said.
“We really never left the global financial crisis. [Growth since then] has all been debt based, and it’s all been revealed. We’ve lost the jobs, and now the policies are the same,” the fixed income specialist explained.
Yield Curve Control
If you consider the possibility of “hyper-hyper QE,” the response of policymakers “certainly could be yield curve control,” he said.
“I certainly do expect that [Federal Reserve Chairman] Jay Powell would follow through on controlling the yield curve should the 30-year rate really get unhinged,” he said.
The 30-year Treasury rate is now close to 1.6%.
“The market is driving them higher, as nobody wants 170 [basis point] 30-year Treasury bonds,” Gundlach said, “… so yields have been creeping higher.”
“Once they move above 2%, the Fed is going to find a blip showing up on their radar screen, and they will start thinking about how high do they want rates to go,” Gundlach said.
“Jay Powell has said that there is no limit to which he will not go …., and that he will expand the balance sheet to infinity if need be,” Gundlach said, adding that traders have given Powell the nickname “Superman.”
The Fed “did control the long end in the aftermath of World War II for a number of years … to control [war-related] debt,” he explained.
The DoubleLine executive also believes the federal funds rate should stay at zero for the next two years.
Negative rates, which he referred to as the biggest “kryptonite” of all, would be “fatal” for the banking system, he said.
The U.S. dollar is probably not going to strengthen in the near term, mainly due to the growing government budget deficit, he explained, and to a lesser extent the trade deficit.
The U.S. national debt may swell to $30 trillion in two to three years, Gundlach says, as the government responds to the coronavirus and the resulting economic crisis.
“The dollar looks terrible,” Gundlach said, and “the biggest reason is the way in which we’re gunning the twin deficits.”
The bond manager says that he’s bullish on gold in the long term. He also sees more downgrades of corporate credit and white-collar unemployment ahead.
Turning to fixed income, he sees commercial mortgage-backed securities and collateralized loan obligations as the “most attractive” segments today. For those willing to take a broader risk outlook, Gundlach pointed to BB- and BBB-rated bonds.
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