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.”

Commodity prices need to rally, Gundlach said, because equities markets are more closely correlated with the price of oil.

Unless oil prices return to and sustain levels over $45 a barrel, a lot of companies could fail — causing a contagion that could reach the financial system.

Gundlach didn’t think the recent bounce in oil prices is sustainable.

“The rally has been insignificant in the context of the long-term decline, ”Gundlach said. “It looks like time is not on your side unless oil prices rally above $45. These sectors are bleeding money every day.”

Until oil prices rise, Gundlach recommended that investors avoid junk bonds.

Also, China’s GDP growth, reported at 7 percent, is probably unrealistic or blatantly falsified, says Gundlach, which means estimates for world GDP growth are probably too high.

“The Chinese business activity index hasn’t been above zero since 2013,” Gundlach said. “Chinese exports and imports are both negative year over year. Explain to me how China’s GDP is growing at 7 percent with Chinese business activity growth at a negative since 201 and with negative imports and export year-on-year.”

Fears over a recession, on the other hand, are premature, Gundlach said.

Gundlach cited unemployment data — the last several recessions coincided with the unemployment rate rising higher than its 12-month average, which won’t happen in the near term, said Gundlach.

“A lot of the problems in the credit market and the stock market have nothing to do with the broad economy, but instead with stress on metals and energy,” Gundlach said.

Core personal consumption expenditures (PCE), which the Fed uses as a measure of inflation, are rising, but commodity prices aren’t following suit.

The dollar has softened thus far in 2016, Gundlach says, but should remain strong over the long term.

The combination of slow growth, a strong dollar, and rising wages should constrain corporate earnings, says Gundlach, which will contribute to the downward pressure on markets.

“I see a lot of forecasts for 7 percent or 10 percent earnings growth, but that is inconsistent with 2 percent GDP growth and with the Fed’s dots saying they will be tightening,” Gundlach said.

Weak markets should cause the Fed to reconsider it’s plans to tighten monetary policy, said Gundlach, pointing to the volatility that occurred after the Fed raised rates in December 2015, the first rate hike in nine years.

“The market collapsed after they raised rates,” said Gundlach. “It’s clear the markets fear deflation and want inflation.”

Negative interest rate policies are bad for the global economy, said Gundlach, because they’re blunting the impact of monetary policy. “Negative rates are bad for the banking system,” he said, pointing to troubles surrounding European banks like Deutsche Bank.

Gold is the one bright spot identified by Gundlach. The current market environment could cause gold to rally, but not the gold miners, “Stay long gold, trim gold miners.”

Gundlach held out gold as a potential bulwark against low or negative interest rate policy.

Though Gundlach acknowledges that politics are driving the economy, he’s not worried about the U.S. presidential election, predicting that Marco Rubio may drop out of the race in the next few days and noting that a Trump win would mean expanded military spending to stimulate the economy.

“It will continue to be an interesting political cycle, but if you think this is a crazy cycle, my forecast four years from now will make this look like child’s play,” Gundlach said, explaining that many key budgetary and economic questions, like the future of Social Security, will have to be settled in the context of the 2020 election

The Federal Open Market Committee will meet next week to decide whether a rate increase is warranted. The market, on the other hand, is not predicting a rate hike until September at the earliest.

“We entered the year with a 50 percent chance of the Fed raising the rates in March,” Gundlach says. “On Feb. 11, the probability of a rate hike any time between now and November hit zero. I think it would be dicey to raise rates again, even though some of the indicators have markedly improved.”