In a ‘grabby market,’ start looking at cash and gold, says DoubleLine’s Gundlach

The Fed’s dovish pivot on Nov. 1 halted the climb in real yields, kicking off an everything rally that started with “blue chip” categories, the so-called bond king told Pensions & Investments editor in chief Jennifer Ablan on the social media service X.

Gundlach spent much of last year pushing for exposure to bonds which suffered throughout 2022 and much of 2023, before a powerful year-end rally sent yields heading lower into 2024.

“So what happens is people feel good about buying blue-chip things. They start buying some S&P 500, and they buy some corporate bonds, and they buy some Treasurys,” he said.

And then “something weird happens,” as those blue chips become overvalued, which he definitely sees that happening for the S&P 500.

The Magnificent Seven tech names that led equities higher in 2023 and into early 2024, such as Tesla
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and Nvidia
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are “keeping up, but they’re not leading. And so that seems to be a place where investors are finding a fully valued situation.”

He expects the S&P 500 could drop all the way to 3,200, in the onset of the next recession, which he has been steadfastly predicting.

The everything rally has made investors “relax their value standards…and they start moving down into junkier things,” contemplating assets they wouldn’t have considered two or three months ago. For example, while consumer delinquencies are worsening, “the middle part of the capital structure securities are on fine…they’re rallying like crazy.”

And that has lead to the “grabby market….it means that people are suddenly lifting every offer,” he said. For example, non-guaranteed residential mortgage market and commercial mortgage-backed securities are seeing “25 times more demand than there is supply” of new issues, he said.

“This feels like the type of environment that we’ve experienced entering the year 2000, where you have tremendous narrow market that’s broadened out because of grabbiness, because of momentum. And I think that the [economic] data that people are looking at is not really all of that informative,” he said.

“So there’s a lot of money sloshing around still, and I think that’s responsible for some of this market valuation,” he said.

As for the Fed, Gundlach sees no change next week to interest rates, as it’s just “too early,” but said the central bank is looking to cut rates because it realizes inflation is coming down.

The manager, who has voiced a lot of caution over the last several months about a potential recession, sees a downturn by mid year, saying that the fact that oil prices aren’t rallying even with Red Sea disruptions, means “the global economy can’t be all that great.”

As for what to avoid? “Most parts of the credit market, even down the capital structure,” as well as assets that have come roaring back to early 2020 levels. “So what I would say is for all of these things that have recovered and gone all the way up, there’s really a very poor risk-reward profile. So you don’t want to own them.”

And as many assets have started to reprice, investors need to start looking around.

“And so you sort of have to start thinking about cash, because I think there’s going to be a lot of opportunities. I’m not saying 100% cash, but I’m saying, I’m saying, I think 20% at least, 25% cash, because I think this stuff’s gonna get cheaper,” he said.

The manager also likes gold
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but has “no interest in bitcoin,” calling that the “worst idea I can think of.” He noted that the new exchange-traded funds mean investors don’t lose all of their money if they lose their passwords, but all the regulation means bitcoin is no longer the “Wild West” investment.

Gundlach also weighed into this year’s U.S. presidential elections, raising doubts about President President Biden’s ability to debate and his stamina, meaning former President Donald Trump would likely end up in the White House again.