Gundlach’s 5 Top Market, Economic Predictions for 2023 and Beyond

Slideshow September 15, 2023 at 04:24 PM Share & Print

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Although leading economic indicators have been “full-on recessionary” for at least a year, one hasn’t materialized yet. But that doesn’t mean we’re in the clear, DoubleLine Capital CEO Jeffrey Gundlach said this week.

The billionaire investor considers a downturn unlikely before the end of 2023 but anticipates a U.S. recession in the second quarter of 2024.

Gundlach and DoubleLine portfolio manager Andrew Hsu, in a webcast Thursday, detailed several signs pointing to recession. While the U.S. consumer is resilient, cracks are starting to show, as credit card delinquencies and defaults are rising, Hsu noted.

Gundlach reiterated that he has more than “nine figures” of his own money in the DoubleLine Total Return Bond Fund, which represents his largest holding.

Check the gallery for five economic and market predictions from Gundlach and DoubleLine.

Dinah Wisenberg Brin

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1. U.S. stocks are not poised for more short-term upside.

“It’s hard to love equities when the risk premium is the lowest in 17 years by a lot,” Gundlach said, noting the S&P 500’s risk premium, which reached 3.5 in 2021, recently stood at 0.61.

“We’re not priced for a recession here at all with the equity risk premium,” he added, noting the economy won’t be as robust next year.

The DoubleLine founder said he doesn’t recommend U.S. equities. While U.S. companies may post earnings increases next year, “I think they’re overstated” and “the market is pretty overvalued,” Gundlach said.

Not counting the seven or eight top-performing stocks in the S&P 500, the index has returned about 2% year to date, not much different from the bond market, Gundlach said. Global bond index yields are twice as high as stock index dividend yields, which is similar to conditions before the global financial crisis, he said.

Responding to a listener question, Gundlach said he “pretty much” aligns with a previous recommendation for a 25-25-25-25 portfolio — 25% each stocks, cash, hard assets and bonds — and favors non-U.S. stocks in the equities allocation.

“Right now the mantra for a lot of investors is T-bill and chill,” Gundlach said, adding he doesn’t recommend that, as collateralized loan obligations provide a spread on top of Treasurys.

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2. A Fed rate cut this year is unlikely.

Gundlach doesn’t expect the Federal Reserve to start cutting interest rates this year. Responding to a listener’s question, he said he anticipates the Fed will start lowering its benchmark interest rate sometime from the second quarter to mid-2024.

The Personal Consumption Expenditures price index, or PCE, a key inflation measure, needs to decline before the Fed stops raising rates, Gundlach said. The core PCE is above 4%, and “the Fed needs this core PCE to go down to 3.5% or lower to think about really putting an end to the interest rate increases once and for all,” he said.

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3. Default risk is growing.

“Money is not cheap at all anymore,” Gundlach said, noting high interest rates. Rising interest on small business borrowers will likely lead to an increase in defaults over time, he said.

DoubleLine portfolio manager Hsu, on the webcast with Gundlach, noted that consumer credit card delinquencies and defaults are rising and approaching pre-pandemic levels.

The credit card asset-backed-security recovery also suggests the consumer is weakening.

Financial stress appears to be more pronounced among lower credit-quality borrowers, Hsu said.

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4. Watch out for stagflation.

The coming recession could be inflationary because of the likely monetary response, i.e., the Fed lowering interest rates, Gundlach said. “The real stagflation might be coming,” he said.

Gundlach noted that unemployment data is getting close to giving a recessionary signal.

Historically, once there’s a 50 basis point increase in the unemployment rate, a recession arrives. It’s gone to 40 basis points, “so we’re not very far away” from a new recessionary signal, he said.

The jobless rate is expected to cross its 36-month moving average in the first quarter next year, and “that would be a full-on recessionary signal,” Gundlach said.

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5. Housing risks should remain low.

Default risk in the housing market is low, according to Gundlach, who said the current housing market has little in common with conditions in 2006, when the risk was “absurdly high.”

Most U.S. ZIP codes have seen big housing price gains relative to mortgages, with prices at highs thanks to a lack of supply and transactions. Gundlach noted that homeowners with low mortgage rates generally aren’t selling, and while home builders are creating new supply, those homes will take a while to enter the market.

Gundlach doesn’t see housing prices declining, absent more new housing or higher unemployment.

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