10 of Jeffrey Gundlach’s Economic, Market Predictions for 2023

2. Inflation will keep falling ...

Inflation is declining and will continue to do into the middle of next year, likely reaching 4% in six or seven months, Gundlach predicted, suggesting the Consumer Price Index has peaked and noting that the ISM Purchasing Managers Index is plummeting.

Gundlach considers it likely that headline year-over-year inflation will be below 4.5% when May 2023 CPI is reported in June.

Among the data points suggesting declining inflation, manufacturing supply delivery days have hit a roughly 40-year low, suggesting weakening demand, he noted.

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3. ... It could even fall too far.

Gundlach doubted economists’ expectations that inflation will fall to about 3% and hold there long-term. (He considers that prediction "strange and implausible," per a DoubleLine tweet Wednesday.)

If the Fed succeeds and inflation falls to 2%, “I predict it will not stop there,” Gundlach said. The inflation rate could go “well below” that level and overshoot to the negative, which would spark a massive bond rally, he said.

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4. The federal funds rate is unlikely to reach 5%.

Gundlach doubts market expectations that the Fed will raise interest rates to a 5% peak next year and briefly hold at that rate.

“I personally don’t think the fed funds rate will make it to 5%,” he said, citing declining inflation.

The market expects the benchmark interest rate to hit about 4.5% at the end of 2023, about the same level it anticipates after next week’s meeting, he noted.

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5. Bonds could be stronger next year.

Next year could bring a stronger bond market under the right circumstances, Gundlach predicted.

If markets stabilize and the Fed has to deal with weakening inflation and possibly recession, Gundlach said, “it’s possible we could see very strong returns in the bond market in 2023.”

As for 2022, he said, “it's by far and away the worst bond year ever.”

Stocks were cheap to bonds entering 2022 but not anymore, he said, explaining that bonds are now cheap to stocks because of their high yields and are more attractive now than they were a year ago.

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6. Consumers are in trouble.

A flagging savings rate suggests a weak U.S. consumer, Gundlach said.

“The savings rate has collapsed, there is no savings by historical standards,” he said, adding that it’s not a good sign when consumers borrow money to buy food and gas. That indicates a “desperate consumer,” he added.

Anecdotes suggest that’s happening and that some Whole Foods shoppers have been switching to Walmart to deal with inflation, Gundlach said.

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7. It's a lousy time to buy real estate, but a good time to invest.

Housing affordability has gone from very good pre-pandemic to its lowest point in about 30 years, Gundlach said, predicting that fewer people will be looking to move given higher mortgage interest rates. Unsurprisingly, he added, no one is refinancing their mortgages now.

The monthly housing payment has gone from about 17% of disposable income pre-pandemic to about 33% now, “so affordability has fallen dramatically,” he said, noting that the 30-year mortgage rate has reached the high 6% range from the 2% range less than two years ago.

The mortgage sector, he said, “is very attractive.” (He emphasized the point in a DoubleLine tweet Wednesday, saying the mortgage-backed securities market in terms of risk-reward is as favorable as any time in the past 25 years.)

Mortgage real estate investment trusts will be in good shape once interest rates peak and the Fed stops tightening, Gundlach predicted, saying this could be an attractive point to buy.

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8. Stocks could strengthen early next year.

The S&P 500 has had a nice rally, but “it’s starting to run out of steam, and we’ll see what happens when we enter 2023,” Gundlach said.

With all the tax-loss selling happening, he suspects there might be a capital redeployment in 2023. Gundlach said he wouldn’t be surprised to see strength in riskier assets in the new year’s first two months.

Growth stocks obviously are significantly underperforming value stocks, an ongoing trend, he added.

The six so-called MANAMA tech stocks that carried the S&P 500 for years are now “sick” stocks, he said. Meta Platforms, Alphabet, Netflix, Apple, Microsoft and Amazon are down significantly year to date, and Gundlach believes they could decline further.

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9. International stocks could take over.

U.S. stocks have outperformed the rest of the world, but that long-term trend could switch if the dollar tops out and the Fed eases its monetary policy, Gundlach said, noting that emerging market stocks have started to perform as the dollar has crested in recent weeks.

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10. More crypto meltdowns are likely.

Gundlach, responding to a webcast audience question, described cryptocurrency as “the ultimate asset for speculation” and said he has never invested in or shorted crypto. Over the past five years, crypto has tended to rise when money’s being spread around, he explained, suggesting investors used pandemic assistance payments to boost crypto.

Bitcoin, which hit an all-time high close to $69,000 in November 2021, now trades below $17,000, about flat to its price five years ago, he noted.

The narrative on crypto has shifted recently from “the new new thing to pet rocks,” Gundlach said, referring to the 1970s gag gift fad.

“When you have rapid speculation you get fraud, and when you get fraud there’s overnight bankruptcy,” he said, an apparent reference to the recent FTX collapse. (He noted the company’s founder has denied committing fraud.)

“My other comment is there’s never one cockroach” and scammers imitate each other. “We’ll see what happens,” he said, noting these events often occur in “frothy markets.”

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