Jeffrey Gundlach’s “Just Markets” 2024: “Too Much to Say”

In his annual “Just Markets” webcast presented Jan. 9, 2024, DoubleLine CEO Jeffrey Gundlach among other outlooks shares his forecast for a U.S. recession, sees U.S. stocks forming a bearish double top and down the road expects an initial rally in bonds upon recession followed by an inflationary monetary response. He also warns of federal deficits turning critical amid an explosion in the federal debt in the context of higher interest rates and, thus, higher interest expense on that debt.

Mr. Gundlach begins the webcast with a review of markets in 2023, which witnessed broad rallies across equities and fixed income, especially credit, while commodities, with the exception of gold and copper, remained weak and the dollar closed down. He then turns to the forward-looking parts of his presentation, titled “Rough Enough,” “Tough Enough,” “Rich Enough” and “Not Too Blind to See,” lyrics from “Beast of Burden,” one of his favorite Rolling Stones songs.

In “Rough Enough”, Mr. Gundlach cites a variety of recessionary indicators – including an inverted U.S. Treasury yield curve, the Leading Economic Index indicators, rising unemployment, and diverging cyclical and noncyclical employment – as precursors to the U.S. economy entering recession in 2024. In “Tough Enough”, he reprises his warnings that the federal government has entered a debt spiral that, contrary to implausible, recession-free projections by the Congressional Budget Office, will become a critical problem due to the growing size of budget deficits and the rolling of maturating debt into securities at higher, prevailing interest rates. Interest expense as a percentage of federal expenditures and the size of the debt relative to gross domestic product, he warns, are set to reach unsustainable levels. The catalyst will likely be the next recession, with a recessionary drop in tax revenues. The initial policy response from Washington, Mr. Gundlach says, could well be a resumption of quantitative easing by the Federal Reserve, which would be inflationary.

In “Rich Enough”, Mr. Gundlach points out markets that appear pricey, beginning with the S&P 500, which has retraced up to near its all-time high on Jan. 4, 2022, forming a bearish double top. He suspects S&P 500 earnings growth will fall short of consensus expectations of 11% for 2024, which would hinder stocks sustaining these levels. Other evidence of a reversal of past trends: Growth stocks have ceased to outperform value stocks, the Magnificent 7 stocks have “gone dead sideways” relative to the S&P 500 since July, and U.S. equity prices have not outperformed the rest of the world for two years.

In “Not Too Blind to See”, Mr. Gundlach sees value in fixed income for those who can traverse “an active-management type of market” as well as trades that are contingent on a declining U.S. dollar in response to U.S. recession. Among the latter, he says, “If the dollar declines when the next recession hits, which I expect, I think the move to make is buy emerging market equities and currencies, and buy commodities.” Gold faces headwinds, but Mr. Gundlach is comfortable holding gold in the expectation of a weakening dollar in the next recession. In fixed income, Mr. Gundlach sees opportunities now for those who can actively navigate these markets. Among high-grade parts of the bond market, he singles out non-Agency residential mortgage-backed securities rated AAA. Although not guaranteed by the government and government-sponsored agencies, he likes the “pretty attractive” yields amid a backdrop of “utterly nonexistent” default risk “given the run-up in home prices over the past few years. Most people have tremendous equity in their homes. They’re not going to default.” Non-Agency commercial mortgage-backed securities represent a mixed bag, he says, with AAA at very low risk for defaults and BBB- offering attractive yields for those who can actively manage the asset class. A similar profile is shared by collateralized loan obligations (CLOs), which are repackaged bank debt: AAA CLOs should be at very low risk of defaults; AA are attractive provided skilled active management.