DoubleLine Round Table Prime, 2023 - Part 2: Market Outlooks 1-4-23

In the second segment of Round Table Prime 2023, the panelists offer their outlooks across equity, fixed income, commodity and other markets. Then they are asked to share hypothetical fixed 12-month asset allocations for the calendar year. The panelists are host DoubleLine CEO Jeffrey Gundlach, and guests James Bianco, President and Macro Strategist at Bianco Research; Danielle DiMartino Booth, CEO of Quill Intelligence; author and Fox Business anchor Charles Payne; and David Rosenberg, President of economic consulting firm Rosenberg Research & Associates. The discussion, recorded Jan. 4, 2023, was moderated by DoubleLine Deputy Chief Investment Officer Jeffrey Sherman.

Mr. Sherman opens the discussion (1:39), asking for thoughts on what was learned from the vehicles of 2022’s excesses such as meme stocks, crypto, SPACs and NFTs (aka digital tokens). “Seeing some of the evaporation of wealth in those assets, what does that connote to the other parts of financial markets?

Is it something endemic, or are these just fads and we shouldn’t extrapolate that to the financial markets?” The panel next discusses speculative excesses and the resulting evaporation of wealth as phenomena of the business cycle (10:42). “Every cycle does have its own unique characteristics and peculiarities, but patterns re-emerge,” Mr. Rosenberg says. “There’s always different culprits where the excesses lie, and then they get exposed in the interest rate cycle.” In the present cycle, Mr. Rosenberg foresees a “15 multiple on recession earnings, and you’re below 3,000 on the S&P (500 Index). So, there’s more pain to come.”

Mr. Sherman next steers the conversation to international (28:05), asking if 2023 will at last see emerging markets equities lead U.S. equities after a decade of underperformance. “The United States is wildly overvalued compared to the rest of the world,” Ms. DiMartino Booth notes. “The United States is still two-thirds of global market capitalization.”

Mr. Gundlach notes that “the rest of the world has started to outperform the United States. You have to look at a relatively short-term view, but since the Fed went to 75 basis point chunks in raising interest rates, EM equity is basically up about well, since November, it’s up 15%.” With the dollar weakening and the U.S. likely in recession in 2023, he says, “I think that the Fed is going to cut rates much more aggressively than the market thinks, and that is going to be impetus for the dollar to weaken. That suggests that the trend change that has occurred may have some legs to it.”

Rounding out the segment, Mr. Sherman asks the panelists for what he calls “free asset allocation advice” (41:57): their optimal investment allocations for 2023. “You can’t touch it. It’s Rip Van Winkle. Go to sleep, we’ll wake up, and we’ll look at it at the end of the year.” The panelists offer a variety of portfolio constructions. Mr. Payne, for example, offers an eclectic mix, including 15% in a longer-duration Treasury exchange-traded fund, less than 5% gold, less than 5% in Bitcoin, 5% in cash and “some whimsical things in the art world.”

For example, as part of Mr. Bianco’s allocation, he puts 50% into a curve trade “because I got two ways to win versus duration.” His curve steepener shorts the front end of the Treasury curve and goes long the back end. In the event of recession, he notes, “the Fed has to cut rates, down come short rates, and you get my steepener, or I’m going to win because the economy hangs in there. And Powell and Neel Kashkari are right. They’re going to five and a half (5.5%), and they’re going to stay there all year. Then the bear market in bonds isn’t over.”