The near-term outlook for equities is at best dim, says Jeffrey Gundlach, DoubleLine Capital's CEO, and a possible rate increase from the Federal Reserve now would cause pain for the markets.
In DoubleLine’s Tuesday afternoon webcast, Gundlach said that markets aren’t considering that the Federal Reserve might adhere to its projected path for interest rate ‘normalization’ — a 300 basis point rise through 2018.
“We continue to marvel at the dot plots by the Fed, which haven’t changed for a long time,” Gundlach said. “The Fed really needs to reconsider these dots.”
The Fed shouldn’t be so eager to diverge from central banks around the world, Gundlach said.
His presentation, titled ‘Connect the Dots,’ asked market participants to recognize that a combination of factors will put downward pressure on markets, despite the recent rally.
The S&P 500 has 2 percent upside compared with 20 percent downside, said Gundlach, yet market sentiment is perplexingly positive.
“Risk markets seem kind of like the attitude towards Ted Cruz,” Gundlach said. “Both are thought to be stronger than they really are.”
The recent restoration in stock prices is a bear-market rally, said Gundlach, who noted that valuations, as measured by the Shiller price-to-earnings ratio, are still high.
In the near term, Gundlach says DoubleLine has been purchasing non-U.S. currency bonds.
“The S&P charts look horrific, a lot like the tops we saw in 2007,” Gundlach said. “When you take out outliers from mining and energy, the valuation levels are a little scary.”