Jeffrey Gundlach is CEO of DoubleLine Capital.
Jessica Rinaldi/Reuters
- Jeffrey Gundlach says stocks look expensive and he expects a recession in the first half of 2024.
- The billionaire investor noted stocks have grown less and less appealing relative to bonds.
- Government overspending could lead to an inflationary recession or “stagflation,” Gundlach said.
Stocks are far too expensive and a recession will probably hit within the next nine months, Jeffrey Gundlach says.
“I think the market is pretty overvalued,” the billionaire CEO of DoubleLine Capital said on a recent company webcast. “It’s hard to love equities when the risk premium is the lowest in 17 years, by a lot.”
Gundlach was referring to the difference in expected returns from stocks versus long-term government bonds, which drives investors to risk their money instead of collecting a guaranteed payout.
The equity risk premium has shrunk markedly in recent months, as rising interest rates have lifted bond yields, and the S&P 500 and Nasdaq Composite have gained 13% and 26% respectively this year.
The veteran fund manager noted that on a global basis, bond yields are almost twice the size of dividend yields from stocks.
“This is a very extreme level,” he said. “This is very similar to the setup prior to the global financial crisis in terms of the relationship between the yield on stocks and bonds, so take that as you will.”
Gundlach also emphasized that stocks have mostly climbed because valuation multiples have expanded, not because corporate earnings have grown. He also pushed back against Wall Street’s expectation that earnings will soar by 11% next year.
“I’m going to take the under because I think the economy will not be as robust,” he said. “We’re not priced for a recession here at all with this equity risk premium.”
The Federal Reserve has hiked interest rates from nearly zero to north of 5% over the past 18 months or so, in an effort to crush historic inflation. Growth and employment have proven resilient, but higher rates will soon throttle the economy in Gundlach’s view.
“I do expect that we’re going to see a recession the first half of 2024,” he said.
Notably, Gundlach raised the prospect of “stagflation” — a painful combination of stagnant economic growth, unemployment, and inflation — as he fears US authorities will try to spend their way out of trouble and inadvertently rekindle inflation.
“I have this suspicion that the government response will be so wild, as it’s been more wild in every recession going back for decades now, that it could be inflationary,” he said. “It could be an inflationary recession.”
The pace of price increases has cooled from a peak of 9.1% last summer to below 4% in recent months, fanning hopes that the Fed will soon hit its target of 2% inflation and begin cutting rates, enabling the economy to skirt a recession.
However, the central bank signaled this week that it might raise rates once more this year, and doesn’t expect to cut rates as aggressively as many investors were hoping. The prospect of “higher for longer” interest rates suggests a stock-market decline and recession are still real possibilities.
