The markets are confused

“The markets remain completely confused as to what will be the trend direction from the election,” he said.

As evidence of that confusion, he said he was struck by the many pundits who called for a crash and global depression following Trump’s victory; many of them, Gundlach said, now claim Trump is great for stocks.

Trump does not have a “magic wand” to offer instantaneous improvement for the economy, Gundlach said. Investors should expect a bumpy ride while Trump strives to deliver on his promises, he said.

Gundlach has been warning against a rise in interest rates. He turned negative in July, when the 10-year bond was yielding 1.35%; it is now just over 2%.

An interest rate rise will not be positive for the economy or the housing market, he said. Monthly mortgage payments are already up 15%, he said, and could go up 20-25% relative to their mid-year levels. Median rents have been “skyrocketing” and renters have had a “horrible decade,” Gundlach said; those benefits in the housing market have accrued to homeowners.

“That is not positive for the psyche of the middle class,” he said.

Nor will Trump’s victory be positive for consumer spending in the short term, according to Gundlach. Trump’s supporters are not economically in a position to spend.

Gundlach warned against overanalyzing the effects of Trump’s ascendency. Since 1988, the same institutions have been in place, he said, with politics dominated by the Bushes, Clintons and Obama. “The trends of the past 28 years cannot be relied upon,” he said.

Gundlach was emphatic about one group of stocks. He said to “avoid the FANGs in a big way” – Facebook, Amazon, Netflix and Google. “It is not a good idea to bet on ideas whose trends are correlated to things that won’t continue,” he said, especially since the market had priced a Clinton victory into the prices of those stocks. Instead, he said to overweight financials, materials and industrials “for the quarters to come.”

Silicon Valley put a lot of money behind Clinton, he said. The irony is that Trump would have lost if not for Twitter, according to Gundlach.

“The people who hate Trump the most were responsible for his winning the election,” he said.

The recession and inflation forecast

Gundlach said the probability of a recession has increased based on his indicator, which measures the unemployment rate relative to its historical moving average. But he did not say a recession is imminent.

He was more focused on the prospects for higher inflation.

Inflation measures, including hourly earnings, the core CPI and core PCE, have “bottomed out,” he said. They are all moving higher, as well as the internet-based Pricestats inflation gauge. In July, the market was predicting 1% inflation “forever,” Gundlach said; now it is saying that outcome is impossible, and inflation will likely be above 2.5% by April.

As a result, Gundlach said he has liked TIPS since September. In the Flexible fund, he said every Treasury bond was a nominal bond at mid-year; now 100% of its Treasury holdings are TIPS. Over the same time, he said, the Core fund went from having 0% to 30% of its Treasury holdings in TIPS.

Where rates are heading and will the EU will break up

Gundlach offered a number of forecasts across the asset-class spectrum, as well as a prediction for the future of the European Union.

Crude oil could find its way to $60/barrel, he said, and it will be hard for it to drop below $40. From oil’s low January at $26/barrel, it may have a 100% price increase.

Gundlach is “somewhat neutral” on gold over the short term and not as positive on it as he was at year end. He advocated “paring back” gold holdings.

He said he was positive on the dollar from 2011 until mid-2015. Now he is positive again, and said the dollar will “move to higher levels.” The dollar has been a leading indicator of Treasury rates, according to Gundlach. With the dollar at a high level, he advised against buying bonds until the 10-year Treasury reaches 2.30% or 2.35%.

But he said he has “relaxed” the “negative sentiment” he had on interest rates in July. He said he is less likely to forecast higher rates now, but is not predicting an instantaneous reversal of yields to the downside.

“The 10-year yield is higher than its average the past five years,” he said. “This is not my definition of a bull market.”

Has said that the 10-year yield could be 6% in five years, but this is not necessarily negative for bond funds. It depends, he said, on how those funds are positioned and the path that rates take to get to a higher level. Some funds, he said, will do fine reinvesting their coupons at progressively higher rates.

The cash flows from bonds go up when prices go down, he said, whereas when stocks drop in price it is because of unfavorable earnings or economic news, which can lead to dividend cuts.

“There are a lot of reasons to be less negative on Treasury bonds than we were four months ago,” he said.

Virtually all other sectors of the bond market are “on the rich side,” Gundlach said, including mortgages, CMBS, corporate bonds (including junk bonds), leveraged loans, emerging markets and municipals. He said the worst thing to own are 30-year corporate bonds.

If you want to own fixed income, he said to “play it in Treasury bonds.”

At the end of the question-and-answer period, he was asked whether he expects another Brexit event and whether the Eurozone would collapse.

There will be another exit, he said, but he doesn’t know which country it will be.

“There is never one cockroach,” Gundlach said.