That said, he quickly noted the wild swings among homebuilder confidence. Attitudes among this group of business executives rose from the depths of despair in March and April to near exuberance this summer as the work-from-home economy began to take shape, Gundlach said. Fully 37% of remote jobs are located in large metropolitan areas and many of these high-income workers are contemplating relocating to less expensive areas with larger living spaces.
Other areas of economic activity remain way below normal levels. Gundlach pointed to TSA figures on airplane travel, which were still off 60% on Labor Day weekend. On a seasonal basis, hotel occupancy rates have rebounded to 50% of last year’s figures.
Small business, considered by many to be the backbone of the U.S. economy, “is taking a disproportionate hit,” Gundlach said. According to one survey, small business revenues were down 20% in August.
Two small businesses that Gundlach never imagined would close in his neighborhood—a coffee and tea shop and a dry cleaner—folded this year. If small businesses remain some of the major casualties of the pandemic, there are likely to be consequences across the entire economy, he said.
He expects the damage from the recent downturn to exert a more severe impact on defaults in the junk bond market than either the 2000-2002 or 2008-2009 recessions did. Yet one wouldn’t know it if they just looked at price levels in today’s high-yield market.
During the 2008-2009 period, spreads between Treasurys and junk bonds with comparable maturities “blew out” as the high-yield market got clocked, he said. This time, he noted, it hasn’t happened, thanks in large part to the Fed’s decision to buy junk bonds and backstop that market.
Still, there have been a series of downgrades and Gundlach doesn’t expect it to let up. That could be the harbinger to a wave of insolvencies, he said.
Finally, Gundlach turned to the equity market. The S&P 500 is in “nose-bleed territory,” he said, but it’s not as bad as 1999.
The dominance of Microsoft, Apple and the four FANG stocks—which accounted for 29% of the S&P 500’s market capitalization—is a warning sign. “The generals are leading the privates into battle,” he said.
The surge in IPOs of special purpose acquisition companies (SPAC) is another “warning sign of imprudent behavior,” he said. The melt-up over the last six months was one of historic proportions.
Equally disconcerting is the participation of retail investors. Gundlach called it “a terrible sign.”