Investment guru Jeffrey Gundlach said the S&P 500 is headed to new lows and that U.S. equities are in a long-term bear market.
Gundlach, speaking on CNBC TV, said passive investing reached "mania status" and will exacerbate market problems.
He “absolutely” believes the S&P 500 will go below the lows that the index hit early in 2018 as the market continues to tumble.
“I’m pretty sure this is a bear market,” Gundlach told CNBC. “We’ve had pretty much all of the variables which characterize a bear market,” the DoubleLine Capital CEO said.
"I think it is a bear market. I think we've had the first leg down and the second leg down is usually more painful than the first leg down," said Gundlach, who oversees more than $123 billion.
"I think this lasts a long time. It has a lot to do with the fact that I believe that we're in a situation that is... highly unusual - that we're increasing the budget deficit so spectacularly so late in the cycle while the Fed is hiking interest rates."
The intraday low for the year in the S&P was on Feb. 9, when it bottomed at 2532.69. The low close for the year was on April 2 at 2581.88. On Monday, the S&P was trading around 2572.
The S&P 500 is not in a bear market yet, down 11 percent from its record high reached in September. Wall Street traditionally defines a bear market as a decline of 20 percent or more, CNBC.com explained.
Gundlach, who is known on Wall Street as the Bond King, also said the Federal Reserve shouldn’t raise interest rates when it meets this week, citing concerns about the bond market and expectations that a slowing economy may require policy reversals in 2020.
Investors are also bracing for the Federal Reserve’s last rate decision of the year on Wednesday, when they are expected to raise interest rates for a fourth time for 2018.
Gundlach said the Fed should not raise interest rates this week but will. “The bond market is basically saying, ‘You know, Fed, there’s no way you should be raising interest rates,’” he said.
The Fed’s quantitative tightening campaign has made markets nervous because of the ultra low levels that have remained in place for several years, Gundlach said.
“The problem is that the Fed shouldn’t have kept them (rates) so low for so long. The problem is, we shouldn’t have had negative interest rates like we still have in Europe. We shouldn’t have had done quantitative easing, which is a circular financing scheme,” he said.
Gundlach took a shot at passive investment strategies such as index funds, declaring the investing strategy a “mania” that is causing widespread problems in global stock markets.
“I’m not at all a fan of passive investing. In fact, I think passive investing ... has reached mania status as we went into the peak of the global stock market,” Gundlach said. “I think, in fact, that passive investing and robo advisers ... are going to exacerbate problems in the market because it’s hurting behavior,” he said.
On Sunday, billionaire investor Stan Druckenmiller urged the Fed to pause its “double-barreled blitz” of higher rates and tighter liquidity when economies are slowing and markets are falling, in an opinion piece in the Wall Street Journal.
The Fed should note developments including global central-bank liquidity reversing from around Oct. 1 and stocks beginning their descent, wrote Druckenmiller, who heads Duquesne Family Office, and Warsh, a visiting fellow in economics at Stanford University’s Hoover Institution.
“We believe the U.S. economy can sustain strong performance next year, but it can ill afford a major policy error, either from the Fed or the rest of the administration,” wrote Druckenmiller and Kevin Warsh, a former member of the Federal Reserve Board.
Wall Street dropped on Monday, but recovered from a slide of over 1 percent, weighed down by an Amazon-led drop in retailers and weakness in health stocks, with gains in banks ahead of a widely expected rate hike limiting losses, Reuters reported.
The S&P and Nasdaq briefly even turned higher, with the swings the latest example of the volatility that has plagued U.S. equities for most of this month and left them with their worst December performance in 16 years as of Friday.
“Investors are fearful. Because of the profit warning, there is an overall question of holiday spending,” said Kim Forrest, senior portfolio manager at Fort Pitt Capital Group in Pittsburgh.
To be sure, with fears about future economic growth roiling markets, financial firms are falling out of vogue with ETF investors at a pace unseen since the collapse of Lehman Brothers.
The $24 billion Financial Select Sector SPDR Fund, ticker XLF, had $1.8 billion of outflows last week, the most since July 2008, Bloomberg reported. The $24 billion fund has seen investors pull $4.6 billion this year, fourth most among non-leveraged U.S. equity exchange-traded funds. Its price has fallen more than 10 percent in December alone.
Concern the economy will buckle under tighter monetary policy and the gradual decline in the quality of lending and has pushed financial stocks into a bear market, accelerating the exodus from the sector. Meanwhile, pessimists are piling in, with the fund’s short interest rising last week to 3.5 percent of shares outstanding, the most in 15 months.
In other comments, Gundlach said:
- 2019 is a capital preservation year with stocks likely to continue a bear market.
- Best bets are actively managed, high-quality, low-volatility, low-duration bond funds.
- The U.S.-China trade war is likely to get worse, hurting the global economy, as China objects to President Donald Trump’s rhetoric.
- Exploding U.S. deficits are likely to drive up the cost of borrowing -- and Treasury rates -- as supply outstrips demand.
Material from Bloomberg and Reuters has been used in this report.
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