A “calamity” could happen, a stock market configuration similar to 1999: Jeffrey Gundlach

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A “calamity” could be coming for markets, potentially in 2023, DoubleLine chief executive and chief investment officer Jeffrey Gundlach warned on stage at the Exchange ETF conference in Miami on Tuesday.

The Treasury market’s yield curve signals “problems ahead,” Gundlach said, referring to the recent reversal in the 2-year TMUBMUSD02Y,
2.380%
and the 10-year yields TMUBMUSD10Y,
2.719%,
that historically preceded a recession. The stock market pattern is “very similar” to that seen in the fourth quarter of 1999, he warned, referring to the build-up to the bursting of the dot-com bubble.

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The S&P 500 was “massively accelerated” by quantitative easing and low rates under central bank policy, according to Gundlach, who said he favored stocks outside the United States. “One of the hardest things” in the investment industry is “changing after you.” I was right, he said.

While the S&P 500 has had an unusually strong run in recent years, it is down so far in 2022 amid heightened concern over the Russia-Ukraine war and expectations of the Federal Reserve to fight back. soaring inflation partly due to interest rate hikes. Gundlach said he expects European stocks to outperform the United States, especially when a recession hits.

When the 2-year and 10-year yields reverse, “you’re supposed to be recession-proof, and we are,” said Gundlach, who is known as the king of bonds. “I don’t expect a recession this year because it takes time.”

To see: US recession indicator ‘not flashing code red yet’, pioneer yield curve researcher says

The yield on the 2-year Treasury note briefly exceeded the 10-year yield recently. A persistent inversion of this curve measure has been a reliable predictor of recession, albeit usually with a lag of more than a year.

The fact that 10-year yields have moved back above 2-year yields “is no cause for celebration if you’re looking for economic growth,” said Gundlach, who also sees disinversion as a cause for concern. .

Meanwhile, the cost of living is “much higher” than the rise captured by the consumer price index, according to Gundlach, who said wage growth and rising rents will be important drivers. inflation this year.

The consumer price index jumped 1.2% in March, fueled by the rising cost of gasoline, food and housing, according to a statement released Tuesday by the US Bureau of Labor Statistics. United. It’s the biggest monthly gain since Hurricane Katrina in 2005, pushing inflation over the past year to 8.5%, the highest since January 1982.

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But core inflation, which excludes food and energy, rose just 0.3% in March for the smallest increase in six months and a potential sign that the soaring cost of living could reach a peak.

“We think inflation will come down” this year, Gundlach said, but remains elevated. He predicted that it would probably drop to around 6%.

Gundlach also lamented a tough 2022 for fixed income so far. With some core bond funds down 12% this year, “we’re talking about a massive bear market,” he said. “Who wants to be ‘bond king’ these days?”

Read also : U.S. government bonds just suffered their worst quarter in the past half-century: Here’s why some investors may not be fazed

Major U.S. stock indices rose on Tuesday afternoon, with the S&P 500 SPX,
+0.00%
up about 0.5%, the Dow Jones Jones Industrial Average DJIA,
-0.03%
gaining 0.3% and the Nasdaq Composite COMP,
+0.19%
climbing 0.7%, according to FactSet data, at last check.

Within fixed income, the yield on the 10-year Treasury note fell about 9 basis points to around 2.68% on Tuesday afternoon, according to FactSet. The 2-year yield was trading below this level, at around 2.38%.

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