That was the consensus in the second part of a roundtable discussion on the 2023 market outlook, hosted by Jeffrey Gundlach, CEO of Los Angeles-based DoubleLine Capital, and moderated by Jeffrey Sherman, DoubleLine's CIO.
In 2022, bonds were “ridiculously overvalued versus stocks,” said Gundlach, but today there is “a complete reversal.”
The discussion began with a recap of themes from last year—specifically, the “excess speculation” that led to phenomena such as the cryptocurrency debacle. Danielle DiMartino Booth, CEO of Quill Intelligence, a boutique research firm in Dallas that focuses on macroeconomic issues, said that speculative investing seems to be declining in 2023. Charles Payne of Fox Business News noted that a lot of the speculative fervor was rebellious and anti-establishment, led by people who would buy certain assets almost to make a political point rather than to realize financial returns. Gundlach agreed that there was a “stick it to the man” sentiment. Then again, he added later, when investors realize that traditional investments aren’t working for them, they just want to “cover their eyes and put [their money] in something that they don’t even know what it is, because if you don’t know that it’s necessarily bad, you’ve got a shot.”
James Bianco, president and macro strategist at Bianco Research, a research and consulting firm in Chicago, lamented that elements of the market “became completely out of control with their speculation,” and he expressed hope for a financial system “without all the casino aspects.” But we’re not there yet, he cautioned.
He cited a type of option called Zero Days Till Expiration (0DTE), which was introduced in November 2022 and today accounts for nearly half the volume of the options market. “People trading options that expire in a few hours,” he explained. “It’s in the same vein as crypto or meme stocks…. It’s all gambling.”
The webcast then turned to David Rosenberg, president of Toronto-based Rosenberg Research and Associates, a noted contrarian who served as chief economist for North America, from 2000 to 2009 and is widely watched for his alternative perspective by institutional investors. He said the cycle of excess speculation—like nearly all market cycles—is driven by interest rates. Last year there were several interest rates shocks. After such shocks, he said, you should expect a downturn in equity markets. That’s been proven historically time and time again, he said. “This is the year of the lag,” he added. But after that should come a pivot point where markets rally. “I expect to be turning very bullish for 2024.”
Yet he is convinced that, before then, there is more pain to come. “If you don’t think there’s going to be a recession, you’ve got your head in the sand,” said Rosenberg, explaining that this is just part of the normal business cycle.
For money managers who have to buy equities, he recommended sticking with defensive names. “Don’t own the cyclicals,” he said. “Own the utilities. Own the staples. Own healthcare.” On the other hand, in the second half of 2024, he anticipates turning more bullish on growth stocks than value stocks as interest rates come down.
The next topic was private markets—that is, alternative investments. Gundlach observed that it wasn’t surprising that these little understood and largely unregulated assets had become popular, considering how uninspiring traditional asset classes were last year. “If the things you do know are definitely bad, you want to eschew them,” he said.
Then Rosenberg brought up another historically proven trend. The first asset class to go into the bear market is always the first to come out of the bear market, he said, adding, “This happens every cycle.”
The bear market in Treasurys started in about August 2020, he said. The bear market for equities started in about December 2021, and the commodities bear market started in June 2022. Treasurys came out of their bear market in October 2022. Equities, he suggested, should be next.
“If you want to turn bullish on stocks, you have to first turn bullish on bonds,” Rosenberg explained. “We all want to turn bullish on equities, and we’re going to get that opportunity. But it can’t happen without the Treasury market rally.”
He forecasted that the inevitable recession will cause a further flight to safety, meaning to Treasury bonds. Disinflation is also likely, followed by interest rate cuts. The stock market will not hit bottom if the Fed is still raising rates, he said, so the market rally won’t come until the Fed reverses course.
“The Fed has got to cut rates in the second half of the year, and maybe pretty aggressively,” said Rosenberg. Until then, he remains bullish on Treasurys, rolling over three-month Treasury bills for the time being. For equities, he said, it’s still a waiting game.