The yield curve is no longer sending a don’t-worry-be-happy signal, warns bond king Jeffrey Gundlach

A rebound with legs may not quite be here, say some. “Bounces from oversold levels tend to be hard and fast, and yesterday’s 150-point intraday reversal definitely counts as hard and fast,” noted Jani Ziedins, of the CrackedMarket blog. “That said, more often than not, the third bounce is the real deal, meaning we could see a couple tests of the lows before this is all said and done.”

On to our call of the day from a so-called bond king, DoubleLine CEO Jeffrey Gundlach, who has unveiled his predictions for the year ahead. And he sees headwinds for a stock market that has been “supported by QE [quantitative easing]” and now faces Fed tapering, with Powell sounding “more hawkish” every time he speaks.

“Today [Tuesday] sounds like Jay Powell repeating the 2018 formula: end QE and raise official short-term interest rates,” Gundlach said in a webcast to clients that was live tweeted late Tuesday. He said that he’s not “predicting a recession yet” but sees those pressures building.

He said the yield curve had seen “pretty powerful flattening” and was “approaching the point where it signals economic weakening. At this stage, the yield curve is no longer sending a don’t-worry-be-happy signal, says Gundlach. It is instead signaling investors to pay attention, he said.

Gundlach highlighted a chart that showed consumer sentiment “free falling,” which “looks somewhat recessionary.” He said surging car prices could be one culprit as prices have climbed so much “people don’t think this is a good time to buy a car if they can find one.” That surge in prices has even made it possible to make money by flipping and selling, he said.

Rex Nutting: Here’s where the inflation came from in 2021

Fund manager Cathie Wood. chief executive of ARK Invest, has warned of a “bloodbath” in the used- and new-car markets.

The money manager said the housing market is being boosted by low supplies and should stay supported provided mortgage rates are low. He is neutral on gold and sees the dollar continuing to weaken.

U.S. stocks are expensive versus equities just about everywhere else, Gundlach said, as he pointed out that European markets, a favorite of his in 2021, were looking good again for 2022.

Looking back on Gundlach’s 2021 forecast, the manager advised a “winning” formula of half cash and Treasury bonds; 25% equities, mostly emerging markets and Asia; and 25% in real assets, such as gold or property, to hedge against higher inflation. He expected U.S. equities would lag behind the rest of the globe, alongside rising inflation and volatility.

The iShares MSCI Emerging Markets ETF
EEM,
+1.66%
lost 5% in 2021, versus a 27% rally for the SPDR S&P 500 ETF trust
SPY,
+0.27%,
a popular exchange-traded fund that tracks the index. Real estate indeed proved a savvy investment spot, though gold dropped 3% in 2021, and Treasury bonds had a dismal year.

The buzz

The data are in and December consumer prices rose 0.5% for the month and 7% on an annual basis, with both numbers coming in stronger than forecast. Still ahead are federal budget numbers and the Fed’s Beige Book.

The European Medicines Agency has warned that too many COVID-19 boosters could end up harming immune systems, echoing comments from the World Health Organization. Meanwhile, the omicron variant may be peaking in the U.K., offering hope for the U.S. and elsewhere. And the White House is getting ready to ship millions of COVID-19 tests to public schools.

Coronavirus Update: Scientists start to predict that omicron will peak in U.S. in coming weeks, but hospitalizations remain at record levels

Biogen shares
BIIB,
-6.70%
are down 9% on news that Medicare will limit coverage of the biotech’s controversial, and expensive, Alzheimer’s drug, Aduhelm, and others like it in the future.

Shares of Immuron
IMRN,
+46.18%
are soaring, after the Australia-based biopharmaceutical company received $4.5 million from the U.S. Defense Department to evaluate a key drug for military use.

A 19-year-old German said he had managed to hack into 13 Tesla
TSLA,
+3.93%
vehicles around the world via a software flaw that let him start the cars, unlock doors and windows and disable security systems.

And a reminder that Friday will mark the start of earnings season, with banks — including Citigroup
C,
+0.25%,
JPMorgan
JPM,
+0.57%,
Wells Fargo
WFC,
+0.61%
and BlackRock
BLK,
-0.35%
— due to report their fourth-quarter results. (See preview.)

The markets

Stocks are higher, led by the Nasdaq
COMP,
+0.23%,
as bond yields hold steady, while the dollar
DXY,
+0.07%
is dropping. Oil prices
CL00,
-0.01%
are rising, with natural-gas futures
NG00,
-0.76%
up over 4%.

The chart

Where does a rise in real yields start to hurt stock investors? A team of strategists at UBS, led by Bhanu Baweja, said that when yields rise more than 40 basis points over three months, “the impact on the market becomes material and goes nonlinear.”

“This is the range we regard as the rough threshold of real-rate pain
for the market. An incremental 10bp rise in real yields from here causes
the market to drop by about 0.8%, ceteris paribus. But what if other
things are not equal? A 5.2-point rise in PMIs will negate the hit to the
market from a 50bp rise in real yields,” said the strategists in a note to clients.

Top tickers

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