Jeffrey Gundlach, the founder and CEO of DoubleLine Capital, is bearish on the U.S.
In a virtual webinar during Schwab’s virtual Impact 2020 conference, he laid out multiple reasons:
- The outlook for GDP growth next year is lower than the rest of the world: 3.7% annual growth versus 5.2% outside the U.S., following a 4% drop this year. U.S. trade and fiscal deficits are growing sharply, and the dollar, as a result, is falling.
- U.S. stocks are overvalued — the cyclically adjusted price-to-earnings ratio of the S&P 500 is 30.6% — and the “Super 6” tech stocks that have driven the currently rally — Facebook, Amazon, Apple, Alphabet, Netflix and Microsoft — have recently begun to underperform.
- Although the U.S. stock market has sharply outperformed other global markets during the last decade, it will fall victim as other global stock markets have after their peaks: Japanese stocks in the 1980s, European stocks in the 1990s and emerging market stocks in the 2000s. None of those made it back to their previous highs, Gundlach said.
“During this recession the U.S. will be the worst performing stock market over the next five years,” Gundlach said. “Therefore, diversification into international investments has never been more interesting.”
He blames Federal Reserve policies for the overvaluation of U.S. equities, which he likened to “passing out candy to the children,” driving a retail frenzy in stocks.
Gundlach said it may be time for investors to abandon tech and health care and go back to energy and financials — the latter helped as the yield curve steepens.
Also supporting a move away from the U.S. stocks and toward emerging markets is the falling dollar, which had rallied during the last decade. “In the years ahead, the U.S. dollar is going down” due to trade and budget deficits, though primarily the latter, Gundlach said.
A weaker dollar would also support commodity prices, including metals, which, in turn, will support emerging market stocks. Gundlach suggested Asian emerging market stocks for investors who want to play it safe and Latin American emerging markets for the risk takers.
As for the bond market, Gundlach favors agency mortgage-backed securities over Treasurys and over AA-rated investment grade corporate bonds. The option-adjusted yields of MBS are similar to those of corporate bonds but their sensitivity to rising interest rates is far less — a duration of 2.3 versus almost 9 for AA-rated corporate bonds.
Gundlach also sees “opportunities in fixed income where there are dangers,” namely BBB-rated collateralized loan obligations, which are repackaged floating-rate bank loans that “will likely see further price gains and probably not more risk.”
Commercial mortgage securities also fall into his dangerous opportunity category. “The single greatest opportunity in the bond market today are A-rated commercial mortgage backed securities,” Gundlach said. They’ve recovered about half their losses due to stimulus spending and can continue to gain in price as the market gets more comfortable with underlying fundamentals, according to Gundlach.
Gundlach is extremely bearish on BBB-rated corporate debt, which has exploded to 250% of the size of the junk bond market. “What if they get downgraded? Where will the buyers come from to cushion the decline?”
He suggests a very strange asset allocation based on the possibility that the current disinflationary situation due to economic turmoil could turn into a hyperinflation scenario later on due policy responses, including the Fed possibly monetizing the U.S. debt. It is an asset allocation that could benefit in a deflationary or inflationary environment: 25% 30-year Treasury bonds and 25% cash — if deflation — and 25% gold and 25% stocks if inflation.
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