Recession remains unlikely, said Gundlach.
“I don’t see a single indicator for recession except corporate debt to GDP, and that’s not a leading indicator,” Gundlach said. “When you live through a low volatility period, you should be concerned. The days of low volatility are probably numbered.”
The Fed also announced on Wednesday that, starting this year, it would gradually try to unwind the $4.5 trillion balance sheet it has accumulated since the financial crisis.
The balance sheet reduction will entail gradually ending or reducing reinvestments as the securities on the Fed’s balance sheet mature in a predictable manner, says Wander. “As long as the Fed continues to paint a picture of reasonable growth and inflation expectations, as long as there are no surprises for the market in these announcements, I don’t think we’ll see a selloff.”
Political uncertainty, especially in the U.S., is exacerbating investor uncertainty. Policy proposals from President Trump that would roll back regulations, lower taxes on businesses and individuals and spend up to $1 trillion over the next decade on infrastructure may be longer in coming than once expected.
“Fixed income markets are conveying two messages about Trump,” says Wander. “One is that it’s unlikely that he will be able to accomplish the things that had initially been intimated on the campaign trail and after his inauguration to the extent that people once believed, and he won’t be able to accomplish them any time soon. Even if progress is made on these issues, it’s unlikely to have a significant impact on inflation expectations.”