The bond king is bracing for a hard economic landing.
“We have been preparing for a hard landing at DoubleLine,” DoubleLine Capital founder and CEO Jeffrey Gundlach exclusively told Yahoo Finance Live.
Gundlach says his investment firm has been girding for such a scenario — a period of very weak economic growth fueled mostly by aggressive Fed interest rate hikes and stubbornly high inflation — for several quarters by increasing exposure to relatively safe Treasury securities.
Ultimately, Gundlach said he thinks it doesn’t matter if there is a “soft” or “hard” landing. He said it’s likely markets are on the cusp of having to digest a sharp economic slowdown — and they are ill prepared to do so.
“People are always asking me this question: how bad the recession is going to be. It doesn’t matter as long as we’re going into recession. You have to have certain degree of protection,” Gundlach said.
He added: “In either case, you need an umbrella.”
Other than a recent spate of volatility in markets this week on fears of a more aggressive pace of Fed rate increases due to still-high inflation, equity markets have mostly ignored the hard-landing scenario.
The Nasdaq Composite (^IXIC) has churned out an 11% gain year-to-date on the back of hype around new artificial intelligence applications from the likes of Microsoft (MSFT), Google (GOOG, GOOGL), and Nvidia (NVDA).
Meantime, the S&P 500 (^GSPC) has advanced 4% as investors position for a rebound of the Chinese economy following the loosening of COVID lockdowns.
But sentiment has begun to turn more negative in markets, which fits with the narrative spun by Gundlach.
JP Morgan strategists pointed out this week the yield curve is staying inverted, and investors shouldn’t ignore the signal’s track record.
When the yield curve inverts, it reflects long-term interest rates falling below short-term rates. The move is indicative of investors putting more money to work in longer-dated bonds amid fear of near-term economic prospects.
When asked if the inverted yield remains a reliable recession indicator, Gundlach said “absolutely.”
“When it first inverts you have got to be on watch,” he added.
Corporate profits have also started to come under pressure as seen this week from big names like Walmart (WMT) and Home Depot (HD), denting the bull case on stocks.
Said Gundlach: “We could see some real Interesting, painful outcomes coming in the next recession, whether it’s very severe or not.”
Programming note: Doubleline CEO Jeffrey Gundlach’s interview with Yahoo Finance will air in Yahoo Finance Live’s 3 p.m. ET hour on Wednesday. Check it out on YouTube or finance.yahoo.com.
Brian Sozzi is Yahoo Finance’s Executive Editor. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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Source: https://finance.yahoo.com/news/jeffrey-gundlach-here-comes-the-hard-economic-landing-200336646.html