Jeffrey Gundlach's 9 Market and Economic Predictions for Investors, Advisors

2. A 40/60 portfolio is the new 60/40 portfolio.

Bonds are attractive now, Gundlach said, suggesting current market conditions call for a major adjustment to the traditional 60% stock and 40% bond portfolio toward holdings more focused on fixed income.

After starting 2022 very badly valued against everything, the bond market now “is demonstrably cheap to the stock market and I recommend not a 60/40 portfolio but more like a 40/60 portfolio or even a 40/25/15 portfolio — bonds, stocks and then other things in the 15%,” he said.

“Bond allocations will prove to be much more rewarding this year,” Gundlach said.

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3. International stocks will become the new equity leaders.

Gundlach “tremendously” favors international over U.S. equities, including European and especially emerging market stocks. He recommends zero U.S. stocks.

“The U.S. has been a world leader,” he said, noting that the MSCI USA Index has “handily beaten” the MSCI World ex USA Index for five years, even though international performance has been mixed. “I think that this trend has reversed.”

European equities have outperformed U.S. stocks since August 2020, and DoubleLine started buying them at that time. Those stocks didn’t do much either way compared to the S&P 500, but the strategy is “definitively working” now, “so that’s a trade that has significant legs and it’s not too late to make the switch.”

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4. A falling dollar will make emerging market stocks more attractive.

From 2010 to 2022, U.S. stocks showed “monumental outperformance” to EM stocks, and while U.S. equities aren’t as overvalued to EM shares now as they were at their most recent peak, the favorable environment for EM “obviously has a lot of room to run,” Gundlach said.

Underpinning this view are Gundlach’s expectations that the U.S. dollar is heading lower and the deficit will likely expand in a recession. EM stocks aren’t as cheap as they were a few months ago but have a good tailwind behind them, he added.

The JPMorgan Emerging Market Currency Index is now above its 200-day moving average and if it stays there for some time, “it’s a massive tailwind for the relative performance of emerging markets versus developed markets, equities and bonds,” Gundlach said.

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5. Almost all signs point to recession.

Gundlach pointed to several economic indicators that suggest a U.S. recession in coming weeks or months.

The U.S. unemployment rate — “the last man standing in terms of parts of the economy, this is what people that want to be bullish on the economy look to” – might cross its 12-month moving average in the next few months, he said. “It would be strong indication that we’re looking at the front edge of a recession.”

The Conference Board Leading Economic Indicator “certainly has the look of recession in it,” now at negative 4.5% year over year, Gundlach said. The six-month number annualized is even worse at negative 7.3%, he said.

“This is heading very sharply into recessionary territory,” Gundlach said. “Once you’ve gotten this negative year-over-year on the LEI, there is no scenario, historically, that a recession was avoided.”

He looked again to the bond market.

“Obviously the yield curve is screaming recession. Thanks to the Fed’s more aggressive actions in the second half of the year the 3-month to the 10-year became inverted,” he noted. The “very inverted” 2-year/10-year Treasury yield curve, Gundlach added, is “obviously a recession indicator.”

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6. Dodging recession is possible, but unlikely.

Some data could give hope to those dismissing recession concerns, Gundlach noted.

A key high-yield market spread “is elevated but nowhere near recession levels. If you want to argue against a recession this would be one of your better arguments,” he said.

“Maybe this time the high-yield market will sit one out as being a recession indicator or maybe the high-yield market is right. So if you want to be an anti-recessionist you’ve still got the labor market kind of working for you and you’ve got the message of the high-yield market working partially on your side, but I would say that’s about it.”

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7. Consumers won't save the economy.

“We’re starting to see the consumer getting much more stressed with the Fed tightening and the lack of government money,” Gundlach said, noting that housing affordability has collapsed to its lowest levels since 1990 and consumers are racking up credit card debt.

“Housing is not rescuing the economy in 2023,” he said, although Gundlach doesn’t expect a rash of mortgage defaults because credit quality on those loans are high and housing prices have risen substantially.

Meanwhile, the U.S. savings rate has dropped dramatically to its lowest since the runup to the 2008 financial crisis, so savings won’t provide wherewithal to the economy, he said.

“Consumers don’t have money,” Gundlach said. “We see all kinds of evidence of consumers having to dip into their credit card to support their basic spending on necessities.” That’s not a sign of consumer confidence, he added. “They’re desperate, rather than happy, they’re desperate.”

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8. Gold is good.

Gold has been good in dollar terms lately and in non-dollar terms for longer.

“I think it’s a reasonable good time to buy gold and own gold,” Gundlach said, noting that the precious metal is above its 200-day trading average and will benefit from a weaker dollar.

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9. Risk assets will have a ‘reasonably’ good first half.

Real yields have stopped going up — good news for risk assets — and are unlikely to rise in the first half of 2023, Gundlach predicted. “That’s one headwind that has been taken away from risk assets,” he said. “Risk assets will start the year reasonably well.”

The S&P 500 forward price-to-earnings ratio is very sensitive to 10-year Treasury real yields, he noted. “Watch real yields, the good news is I think that they will be less of a headwind certainly than they were a year ago.”

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