From its all-time high on February 12, the S&P 500 hit a bottom of 2,237 on March 23. But it will go lower this year, according to Jeffrey Gundlach, and only then will he buy stocks.
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Gundlach spoke to investors via a webcast, which he titled “A Tale of Two Sinks.” Slides from that webcast are available here. Gundlach is the founder and chairman of Los Angeles-based DoubleLine Capital.
Compared with prior market crashes, Gundlach said, this one most resembles 1929. Typically the market goes to a “crash low,” he said, and then there is a snap back, followed by another move down and then an enduring low.
“The low from mid-March will get taken out,” he said, and he will be interested in buying at that time.
He compared U.S. equities to Japan in 1989, Europe in 1999 and the emerging markets in 2006. Like those markets, “the U.S. will be a poor performer and it will not get back to its high on a real basis,” Gundlach said.
The economy faces deflation. The drop in oil and copper prices has “devastated U.S. industries,” he said. Based on historical patterns of commodity prices, Gundlach said, there is no hope to think the economy will rebound in Q3.
Will the stimulus cause inflation? It is like a titration exercise in chemistry, Gundlach said, where you drop a colored liquid slowly into a jar until the correct color is observed. “We’ve been doing titration by drip with QE,” he said. “Now we are letting it rip. Sending money people directly is the easiest way to create inflation.”
Gundlach waded into the controversial topic of stock buybacks. He said that the airline industry spent $45 billion in buybacks over the last five years, but got $58 billion in support from the federal government. “Let them go bankrupt,” he said. “The planes won’t disappear.” The airlines drained the liquidity that they need now, he said.
“The government is effectively buying back shares for more than the airlines paid for them,” he said. “The buybacks are obviously are going away.”
Airline usage is down 94% year-over-year, he said, based on Bank of America data.
The title of the talk relates to the two sinks that Gundlach has in his kitchen. He said he never used one of them, until the other started leaking. Then he started using it and found he liked it better than the original one. The plumbers came and fixed the original one, he said, but he didn’t go back to using it.
“When we go through this stay-at-home period,” Gundlach said, “we start to change our habits. The lessons we learned about commuting, working from home and not polluting the air sink in, and we may never go back to where we were, particularly the longer it drags on.”
The title is also derived from a 1985 sculpture, The Ascending Sink, by the modern artist Robert Gober.
Those sinks symbolize the daily human war against dirt, Gundlach said, “with an obvious message to our regimen of washing our hands.”
Let’s look at Gundlach’s assessment of the global economy and the capital markets.
Read the full article here by Robert Huebscher, Advisor Perspectives
