A month after saying that he’d bet against a Biden win at the polls in November, DoubleLine Capital CEO Jeffrey Gundlach reiterated his “base case,” which is that President Donald Trump “will get reelected,” though he did highlight the key factor that could change that scenario.
His conclusion is tied to the shrinking lead Democratic candidate Joe Biden holds over the president and a correlation between the number of new COVID-19 cases and Trump’s approval rating, Gundlach explained during a webcast late Tuesday — which included a discussion of the latest economic and market trends highlighting 100-plus charts.
“It seems the coronavirus is going to be a large determinant of whether President Trump gets reelected or not,” he said.
“If cases start to flare up again in a major way, that would make the prediction invalid,” Gundlach explained.
The political race for control of the Senate, he said, “is almost a dead heat.”
“Here’s another interesting fact,” Gundlach said In his discussion of the equity markets and recent price-to-earnings levels. “The last six months have shown the greatest multiple expansions, PE ratios, in 30 years. This has been the ‘melt-up’ of an historic proportion in terms of its speed.”
As for the role of individuals, “retail investor activity is downright terrifying,” Gundlach said. “It looks like people are kind of regifting the candy that was given to them,” he said, in reference to government support of the economy and the financial markets. ”They’re not really eating it. They’re gifting it.”
The act of “throwing that candy into this retail investment fervor, off course, … is a terrible sign for the condition of the market for anybody who has experienced a significant number of cycles, which I’ve definitely experienced,” the DoubleLine executive added.
Gundlach pointed to more red flags for equities, including their recent weakening: ”Here’s the party, which may have ended a week ago.”
The ratio of the S&P 500 market capitalization to the U.S. gross domestic product is “the highest of all time,” Gundlach said, meaning that the index “is the most overvalued in U.S. market history.”
The FAANG stocks — Facebook, Amazon, Apple, Netflix and Google — “have had a massive overperformance this year,” he said.
Describing the markets as a war — with smaller firms being the privates who “abandoned the battlefield” earlier during the recent rally — “maybe the generals [too] are starting to abandon the battlefield,” Gundlach said, “which is a real problem.”
Since early July, the FAANGs “have actually been underperforming the S&P 500, which is always something to look for — when the leader … is no longer showing leadership that characterized the long bull market that preceded the blow-off, that’s something to pay attention to,” he said.