Bond guru Jeffrey Gundlach predicted Tuesday that the S&P 500 would have a negative return at the end of this year if the 10-year US Treasury makes an accelerated move above 3%.
The chief executive of DoubleLine Capital said in a webcast named ‘Inflation Is Inflationary’ that an expanding US budget deficit, coupled with the Federal Reserve’s quantitative tightening meant that there would have to be a large issuance in Treasurys to cover the deficit. The increased bond supply would in turn lead to a rise in bond yields.
The current yield on the 10-year Treasury is 2.83% and has picked up momentum since Gundlach last predicted it would reach 6% by the next presidential election or a year after that.
‘It seems to me that we are going to have a negative return on the S&P 500 based on what’s been happening so far,’ said Gundlach. ‘My conviction on that is actually higher than my conviction right now on whether bond yields are going to break to the upside or downside.’
Gundlach first predicted that the S&P 500 would finish 2018 with a negative return on a January webcast during, on which he said the S&P would wipe out the entire gain of the first part of the year when it falls.
Gundlach, who said on the Tuesday webcast that he is wrong about 30% of the time but right about 70% of the time, saw his prediction partially come true in early February when a market sell-off and volatility spike saw the S&P erase all of its gains for the year before bouncing back.
The bond manager also referenced to what he believes is a ‘concerning’ remark from Treasury secretary Steven Mnuchin who said in a February interview with Bloomberg that the Trump administration could successfully lift the wages of the American workers without triggering broader higher inflation.
‘When I started in this business, everyone is worried about inflation; now we have this the exact opposite, we have a Treasury secretary who thinks higher wages and interest rates don’t mean high inflation,’ said Gundlach. ‘I think that’s concerning.’
He also commented on the sectors of the market he believes are bad trades, which include tech, financials and semiconductors, which have all crept back to their peak levels of mania, he said.
‘These are not great locations, these are bad trade locations, things to be watched out for. I’m not talking about fundamentals, I’m just speaking as a chart reader,’ he said.
Gundlach added that the emerging markets has had an incredibly strong performance whereas Europe underperformed massively. He said that Europe is the definition of a ‘value trap’ that is getting cheaper and cheaper.
While Gundlach has said in previous webcasts that he does not buy into the bitcoin mania, he believes the cryptocurrency is a good assessment of stock market movements.
‘I think bitcoin is part of the Rosetta stone to understand what is happening with the social mood,’ said Gundlach who explained that bitcoin fell to its bottom while the S&P 500 was crashing
Bitcoin has fallen from its all-time high of almost $20,000 per coin last December to $8,680 per coin as of March 14, according to Coindesk.
Los Angeles, California-based DoubleLine had $118 billion assets under management at the end of last year.