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.
“From a traditional analysis perspective … [and concerning] the generals having abandoned the battlefield, maybe it’s a little too early to tell,” Gundlach added. “But if we take out that low in relative performance that [we saw] earlier this summer, that’s a very bad sign.”
PE Ratios Partying Like It’s 1999 — or 1929
At current levels, the S&P 500 PE ratio “is in nosebleed territory,” he said. “And this actually doesn’t even include Tesla, because they’re not in there.”
Furthermore, this ratio is “looking like 1999, not quite as bad, but it’s in the same ballpark,” Gundlach stated.
Turning to forward S&P 500 PE data, it “has actually reached the most overvalued [level], basically the nasty overvaluation preceding the dot-com bust, he explained. “This is not a cheap market.”
The DoubleLine executive then turned to the cyclically adjusted PE, or CAPE, indicator for the S&P.
“It looks like 1929 on the CAPE ratio, with only the dot-com situation [being] worse,” he said, adding that back then there were “all kinds of companies that didn’t have any revenue.”
Referencing blind investment pools and “froth” of that earlier period, this type of behavior “has exploded [in 2020], which is just another huge warning sign that there is imprudent behavior that’s going on at this party,” he said.
“And yet the clown just keeps giving out the candy,” added Gundlach.
He added the short-term downward moves in the markets have him short-term bullish on the U.S. dollar.
“This is one thing that’s characterized this melt-up in the S&P 500 — it’s happened with the dollar going down and now … going up a little bit,” Gundlach said. “In fact, DoubleLine turned positive on the dollar for the first time in a long time, a couple of weeks ago as a tactical [short-term] move, and I’m still a dollar bear long term.”
He sees the greenback being in “a counter-trend rally, which suggests that the recent activity in the stock market is falling.”
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