MW Bond king Gundlach says investors have 'left the bus' as yields spike during Fed cuts. Here's his advice.

By Barbara Kollmeyer

DoubleLine chief advises against T-bill and chill

All is fairly calm ahead of what's being billed as the "most important inflation reading in recent memory."

Ahead of that, DoubleLine Capital's chief investment officer and founder Jeff Gundlach sounded off on the economy and markets in webcast to clients late Tuesday, according to a blow-by-blow of that on the company's X account.

The man known as the bond king a swipe at the world's most influential central bank: "The Fed looks like Mr. Magoo, driving around, bumping into things." While the Fed succeeded in bringing down inflation, it's been reacting too much to short-term data and not being strategic over the last five years.

Another warning from him: "In 40 years we haven't had a recession that didn't include the long bond yield declining. Don't count on that now. This time is different. We have left the bus. We're in a new environment."

That "bus" reference, he explains, refers to a concept from Neil Howe's book "The Fourth Turning: An American Prophecy" that talks about big generational cycles, with the fourth referring to the last one of crisis and transformation.

Gundlach spent much time discussing December's big yield curve steepening - when rates on longer-term bonds rise more than shorter ones. Roiling stocks, the 10-year and 30-year Treasury notes have been flirting with 5% levels amid concerns over inflation, a strong economy and fewer rate cuts in 2025.

He notes that during past Fed cutting cycles, the 10-year Treasury has never gone up, yet now it has by 100 basis points. "Something is different this time," he adds.

"The Fed is now in sync with the market, and the market is not given further signals for a change. That is consistent with the Fed slowing down its change of monetary policy. That's one of the reasons why the stock market has not been happy in recent weeks," he said.

The investor discussed "terrible" housing affordability, with interest rates up 100 basis points just in the last four months," and a dramatic rise in credit card write-offs that should be watched closely.

That's as many are banking on a much better economy under President-elect Donald Trump, he said, noting skyrocketing small-business optimism and households expecting financial situations to improve. "People are just mapping 2016-2017 onto today," he said.

"Consumer expectations have been shooting higher. That is not bullish given today's valuations," said Gundlach. Not usually a fan of stocks, he commented that the S&P 500 and component sectors are at "historical highs" in terms of valuations. Bank of America strategists last week warned that stocks are in fact, "expensive on any valuation metric."

He says U.S. equity outperformance versus the rest of the world is "ridiculously extended," but probably won't reverse until the dollar tops out, and he says that hasn't likely happened yet. And commodities prices have held up despite dollar gains, which he says is an "unusual divergence. An interest paired trade would be to short the dollar and short commodities."

But he also said gold has been seeing heavy buying, chiefly by central banks. "People are seeing safety in gold. I agree," he said.

What else does he like? If the Fed does stand pat on interest rates this year, he said volatility should come down and that "should be good for agency MBS. The current mortgage rate is about 7%. So no refinance risk in the MBS market." Gundlach is referring here to residential mortgage-backed securities that are backed and guaranteed by U.S. government agencies.

He said his firm continues to advise against so-called "T-bill and chill," which worked for many investors in 2022 and part of 2023 - it involves investing in investing in risk-free government short-term debt. He said they see "reinvestment risk here," and instead believe "shorter-term high quality bond funds makes more sense."

The markets

U.S. stock futures (ES00) (YM00) (NQ00) are slightly higher ahead of CPI data, with Treasury yields BX:TMUBMUSD10Y BX:TMUBMUSD02Y softer and the dollar DXY dropping.

   Key asset performance                                                Last       5d      1m      YTD     1y 
   S&P 500                                                              5842.91    -1.12%  -3.43%  -0.66%  22.60% 
   Nasdaq Composite                                                     19,044.39  -2.28%  -5.29%  -1.38%  27.44% 
   10-year Treasury                                                     4.774      6.80    25.50   19.80   66.54 
   Gold                                                                 2709.6     1.10%   4.23%   2.66%   34.88% 
   Oil                                                                  76.5       4.34%   10.14%  6.44%   5.02% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

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The buzz

Goldman Sachs $(GS)$, JPMorgan Chase $(JPM)$, BlackRock $(BLK)$, Bank of New York Mellon $(BK)$, Wells Fargo $(WFC)$ and Citigroup (C) are kicking off earnings season, and analysts are optimistic about what the sector will deliver.

Consumer prices are due for release at 8:30 a.m. and economists are forecasting a headline rise to 2.9% in December from 2.7%, with monthly core and headline inflation expected to repeat a 0.3% rise from November. Due at the same time is the Empire State manufacturing survey.

A handful of Fed appearances are also ahead, with Richmond Fed Pres. Barkin due to speak around 9:20 a.m., New York Fed Pres. John Williams at 11 a.m. and Chicago Fed Pres. Austan Goolsbee at 12 noon. The Fed Beige Book of economic conditions is coming at 2 p.m.

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The chart

Stock prices used to be a leading indicator for the economy, but they're not any more, according to EPB Research. Over the last 50 years, there have been four declines in earnings greater than 5% that were not associated with recessions, marked here with an orange circle. As for why stock prices are no longer leading indicators, they note S&P 500 now has more of a services-sector than industrial weight, and also the structure of the stock market is more passive.

Top tickers

These were the top-searched tickers on MarketWatch as of 6 a.m.:

   Ticker  Security name 
   NVDA    Nvidia 
   TSLA    Tesla 
   GME     GameStop 
   RGTI    Rigetti Computing 
   TSM     Taiwan Semiconductor Manufacturing 
   QBTS    D-Wave Quantum 
   PLTR    Palantir Technologies 
   AAPL    Apple 
   MSTR    MicroStrategy 
   JPM     JPMorgan Chase & Co. 

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-Barbara Kollmeyer

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January 15, 2025 07:02 ET (12:02 GMT)

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