In his annual “Just Markets” webcast on Tuesday, DoubleLine Capital chief investment officer Jeffrey Gundlach gave his predictions for the year ahead on a number of asset classes, including stocks, bonds, corporate credit, and yes, even bitcoin – which, for those brave enough to jump in, could be crawling its way back to $5,000.
Ignore him if you like, but many of Gundlach’s predictions for the past year became reality, including the monster sell-off in stocks in December.
He warned on December 17 that stocks would hit new lows, saying “I’m pretty sure this is a bear market,” just before the market took a massive dive on Christmas Eve, when the S&P 500 dipped into bear market territory. He’s now warning that the market’s buy-the-dip mentality looks somewhat reminiscent to what happened leading up to the subprime crisis.
“People were panicking in the later part of December. They were panicking, actually, but the flow data shows they were panicking into stocks, not out of stocks,” Gundlach said. “People have been so programmed, and feel so frustrated by selling when we gets dips, that this time they weren’t going to be fooled. This time, they were going to buy the dip. I worry about that though, because it reminds me a little bit how the credit crisis developed in 2007 and 2008.”
“The people who bought the dip, they didn’t sell, they hung on, and the market started to crack again. And we have that waterfall that ended up happening. The people who bought the dip ended up getting scared and turned from buyers into sellers. There’s potential for that here.”
Gundlach, who manages more than $200 billion, sees another volatile year ahead and said in the webcast that he expects higher yields will hurt stocks in a “tug of war” where the stock market will be in a push-pull relationship with rates expectations, while also warning that the market downturn could be a prolonged one.
The DoubleLine founder threw a bit of shade at Fed Chairman Jerome Powell regarding Powell’s comments on Friday about interest rate hikes this year, saying that the Fed chief “went from pragmatic Powell to Powell put and the markets have been throwing a party since then.”
He also discussed the meltdown in junk bonds in December. Junk bonds have seen a bit of a revival since then, but Gundlach said investors should use those gains “as a gift and get out of them,” as junk bond spreads are among those “flashing yellow” on the recession front and again looked back to what happened leading up to the financial crisis.
“Investors bought bank loans and high yield, I can understand why you buy the dip, I get it, buying the dip certainly worked back in 2016 and if you missed that, you feel bad about it,” Gundlach said. “But like I said about subprime back in 2007, the first people, they buy the dip, they’ve never done that before, but they’ve been trained now to do it after continued frustration for not doing so, and then when prices head lower, suddenly those buyers turn into sellers, and with all the supply that’s coming, it’s a really interesting issue who’s going to buy it.”
In other words, at this point, it’s better to stay away from risky investments and capital preservation is key now as we may be nearing the point when the buy-the-dip strategy is going to fail as the dips are going to become much more.
Instead, he encouraged investors to seek companies with strong balance sheets, “That’s going to be the way to survive the zigzags in 2019.”