2018 Forecast – Gundlach’s Predictions

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Published by Taylor Financial Group

One of our favorite professional investors is Jeffrey Gundlach, Founder of Los Angeles-based DoubleLine Capital (assets under management exceeding $109 billion). Gundlach is a very independent thinker and has an impressive tradition of making great calls. Before we jump to 2018, let’s review some of Gundlach’s 2017 predictions that were on target.

  1. He predicted a Trump victory well in advance of the election!
  2. He advised that investors should diversify globally, and although the S&P 500 returned 21.7% in 2017, the MSCI World Index returned 24.4%.
  3. He predicted that the Trump presidency would experience better than 2% GDP growth and that there would not be a recession.
  4. He predicted moderately higher inflation. Inflation in 2016 was 1.26%, and rose to 2.13% in 2017.

Given Gundlach’s astounding record of accurate predictions here and elsewhere, we thought it worth our while to review some of Gundlach’s thoughts for 2018.

Market Performance – Staying Away from the S&P 500 and Embrace International and Emerging Markets

According to Gundlach, we are nearing a record for the longest period of time without a 5% correction in U.S. equity performance.  Gundlach is predicting that the end to this period is nearing, and cautions that investors may want to stay away from the S&P 500, as he predicts a loss for 2018.  He reminds us that although volatility is extremely low, valuations are troubling.

According to Gundlach, emerging markets will be hurt by the dollar rallying, in the short term.  But, he advises that investors should stick it out for the long haul and hold emerging markets for many years because their Shiller ratios are half of that of the S&P 500.  As 2018 moves forward, Gundlach predicts that the dollar will go down, which will help commodities.

Commodities

Commodities are one of Gundlach’s biggest bets for 2018. He said commodities may be one of the best investments this year as they surge during the late phase of the economic cycle. He believes that commodities will outperform in 2018 because of the current weakness of commodities relative to stocks (along with potentially higher inflation).  He points out that late in the business cycle (and going into each of the last five recessions), commodities have rallied strongly.  He advises investors to “buy commodities in a broadly diversified basket.” Goldman Sachs also happens to agree with Gundlach’s call and reiterated its 12-month overweight recommendation.

Global Economies – No Fear of Recession

Gundlach says he sees no recession in sight.  He points out that the unemployment rate is at a new low and, if hiring continues at the current rate, Gundlach predicts it will fall even further.  Moreover, many of the other typical signs of recession are nowhere to be found.  Gundlach thinks we are in the midst of a “magic moment” in terms of the global economy.

Due to quantitative easing (QE), Gundlach says markets are currently “levitating,” but he warns that things are going to change as central banks begin to tighten their monetary policies.  Gundlach points out that every country is currently growing and will continue to do so for at least the next two quarters.  However, do not expect strong market performance simply based on economic data or the absence of a recession, as these sentiments are already priced into the market.  Keep in mind, despite all of the tension and rhetoric on the Korean peninsula, the South Korean market has gone up around 25%!

Gundlach believes that central bank balance sheets have been highly correlated to both equity price increases and junk bond spreads, and by mid-2018, the Fed and ECB (and potentially Japan) will all be shrinking their balance sheets.  He states that investors should be concerned that the ECB may change its position and tighten policies, and therefore European markets should be avoided.

Bitcoin – Don’t Believe the Hype

Gundlach strongly warns against falling for the bitcoin mania.  He claims it is risky and not safe or secure.  He does not say much more about it except to stay away!

Interest Rates

Interest rate risk is real right now, advises Gundlach, especially for investors who invested big in corporate bonds.  He calls attention to the fact that a rate of 2.63% could trigger a bear market, and the 10-year Treasury is currently at 2.54%.  Likewise, if the 30-year bond, which is currently at 3%, gets to 3.22%, the bond bull market is over, according to Gundlach.  However, Gundlach does indicate that the 2-year Treasury bond yields (approximately 2%) are more than the S&P 500 dividend yield, which makes bonds an obvious safe investment, potentially hurting equity prices going forward.

Gundlach seems to get it right more than he gets it wrong and we are looking forward to seeing how his predictions for 2018 pan out.  As always, we will keep you apprised of market and economic news.

If you have any questions, please give us a call.

 

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