Keep a watch out for action by the European Central Bank to end its quantitative easing—a move that could push up rates in the U.S. and end the bull market run in stocks, said bond manager Jeffrey Gundlach during a webcast Tuesday.
“It really is kind of crazy” to see the Fed raising rates while the ECB has maintained its easy money policy, said Gundlach, chief executive of DoubleLine Capital.
Financial metrics like GDP growth and inflation are about the same in the eurozone and the U.S., while retail sales and loan growth in Europe are somewhat stronger, he said.
ECB head Mario Draghi is worried about the euro area, its banking system and the finances of individual countries, Gundlach said, so Draghi has been reluctant to end quantitative easing.
But “the rhetoric has gotten a little more hawkish from the ECB,” he said, so “one of these days, when [the ECB begins to] taper, or people perceive a more hawkish position from the ECB, the German 10-year [bond yield] is going to move higher [and it] will move to one percent pretty quickly” from around 40 basis points now. “And that would be the catalyst for U.S. rates to rise as well.”
Gundlach doesn’t foresee a huge jump in the U.S. 10-year benchmark rate, but thinks it could move up by about half a point from its current 2.17 percent level.
Stocks, though, could face greater difficulty once the ECB shifts policy.
That could spell “trouble” for equities in the middle part of next year, he said.
Gundlach noted weakness in the breadth of the U.S. market, with smaller stocks not participating as much in the rally. And he called the price-to-sales ratio on the S&P 500 index “flat-out terrible,” approaching expensive levels last seen in 1998 and 1999.
The famed bond manager is also bearish on the dollar long term, but expects a short-term rally from the buck’s oversold status.