Jeffrey Gundlach thinks that 2018 will be a down year for equities, with a negative S&P 500 return.

In a Tuesday webcast entitled “Inflation is Inflationary,” Gundlach, CIO of DoubleLine Capital, reiterated his conviction that risk assets will suffer in 2018, but dismissed the idea that a recession was imminent.

“It seems to me that we are going to have a negative rate of return on the S&P 500 this year, and my conviction on that is pretty high—higher than my conviction on whether bond yields break to the upside or the downside,” said Gundlach, who added that 10-year Treasury yields should break to the upside.

Gundlach predicted that if the 10-year Treasury yield reaches 3 percent, the nine-year bull market will come to an end. Such a move would increase his conviction that the S&P 500 will end 2018 in the red.

The 10-year U.S. Treasury has hovered over 2.8 for several weeks, a rise that coincided with volatility in equity markets.

“This is shaping up to be a very different year from the one that just passed in 2017,” said Gundlach. “We no longer have non-volatile markets. We’ve moved into a regime of volatility.”

Gundlach offered five indicators that suggest a recession is not likely in the near term: rising leading economic indicators, expanding manufacturing production, stable real GDP, stable business and consumer sentiment and stable high-yield spreads.

Last week, Gundlach played down the likelihood of a recession while predicting a fractious 2020 election cycle at John Maudlin's Strategic Investment Conference.

In the webcast, he dismissed the belief that rising interest rates would “kill” the economy, noting that interest rates have already risen by 200 basis points amid an improving economic climate.

On inflation, Gundlach said the U.S. has already met or passed the Fed’s 2 percent target.

He was critical of  comments made last month by U.S. Treasury Secretary Steven Mnuchin implying that U.S. wages could rise without a corresponding jump in inflation.

“It’s a little disconcerting that a secretary of the Treasury doesn’t think inflation is inflationary: Of course inflation is, and rising wage inflation is, inflationary,” said Gundlach.  “If we raise tariffs, if we raise the prices on goods, that as well is inflationary.”

Gundlach, the manager of the DoubleLine Total Return Bond Fund (DBLTX), also sounded alarms over the size of the U.S. budget deficit, projecting that it will rise as high as $1.3 trillion in 2019 as the effects of lower tax revenues and increased spending combine with the higher cost of debt servicing.

“The deficit is expanding even though we’re late in the economic cycle and it should be shrinking in Keynsian terms,” said Gundlach. “We already have our deficit expanding, and we’re heading into a compounding cycle with entitlement programs that I’ve been talking about becoming a problem.”

The growing debt supply combined with the Fed’s quantitative tightening will serve to lift bond yields, perhaps beyond the 3 percent threshold, he said.

“If quantitative easing was a tailwind for financial assets, then clearly, quantitative tightening will necessarily be a headwind,” he said.

Thanks to the weakening dollar, investors may still find opportunities in risk assets overseas, he said, while projecting declining returns in Europe, Japan and emerging markets.-