Advisor Perspectives reports on a recent market outlook presentation by Jeffrey Gundlach, who it describes as a “prescient and accurate forecaster.” Gundlach said: “Now is not the time to be a hero,” reasoning, “this is a market where you don’t make a lot of money. You try to protect your capital and then play another day.” He said “the centerpiece of the problem that is facing the markets today” is that large developed economies will not grow fast enough.
Gundlach commented on more specific topics as well. He highlighted a recession in the manufacturing sector globally as well as weakening in the U.S. service sector, noting that if the latter “falls much lower, we would have to say that the odds of recession are going up towards 50% in the United States.” Regarding the Fed, Gundlach suggested it would not revert to easing but also that he did not expect it to raise rates as aggressively as some of its members’ comments suggested in 2016.
Globally, he observed that “it is crystal clear that China is incredibly weak,” opining that it “doesn’t have a chance of being what it was in its boom years.” Noting the volatility caused by China’s previous devaluation of the yuan, he said “it looks to me like the yuan is going to have to be allowed to weaken further.” Gundlach commented it is “difficult to be bullish” on emerging market equities, noting the effect of Chinese weakening on commodity prices and the effect of such prices on the emerging markets generally. While he described Brazil as “basically in a depression,” he remained long-term bullish on India. “When it is as scary as you can possibly imagine,” he advised, “buy India.”
In the U.S. markets, Gundlach said “success or failure for bonds in 2016 is going to be based on which way” the yield on 10-year Treasuries breaks, “and it should break in the next few days or weeks ahead.” Gundlach also noted all-time high leverage in high-yield bonds but said he “may be a buyer of junk bonds down the line” and it would be among the “better opportunities to come around in years.” He noted that junk bond prices tend to weaken about two years before a peak in stock prices, suggesting the S&P either has to fall or credit has to rally – and he sees the former as much more likely. He observed that S&P earnings have “massively underperformed” and expressed skepticism regarding predictions of an 18% rise in earnings. He opined: “There is a stealth bear market going on.” Overall, he commented: “we will see the market struggle in the first part of this year and then create potentially a very good buying opportunity later in the year.”