DoubleLine's Gundlach sees ‘very painful’ economic downturn, S&P 500 may be forming ‘double top’

Published Tue, Jan 9 20245:57 PM ESTUpdated Tue, Jan 9 20246:24 PM EST

DoubleLine Capital CEO Jeffrey Gundlach said Tuesday that he sees the chance of a severe recession coming in 2024 and that the S & P 500 , possibly in anticipation, may be forming a particularly bearish technical trading pattern. Gundlach, a noted fixed income investor whose firm managed $96 billion as of last June, has been calling a recession since early last year. He now sees an even higher likelihood as a result of stronger recessionary signals springing from the bond market. He highlighted the inversion of the 2-year and 10-year Treasury note yields, where 2-years yield more than 10-years, and the fact that it has been in the process of reversing. The yield-curve inversion has been a reliable recession predictor and signs of a reversal could be indicative of an imminent economic downturn. "The curve de-inverting is highly suggestive of a recession. And I think the dollar is going to have big problems in the next recession, as a consequence of the policies that we run to try to deal with what could be a very painful recession," Gundlach said in a DoubleLine investor webcast. He added that the curve between 2- and 10-year Treasury yields had been inverted for 79 weeks, close to a record of 89 weeks set during the Carter administration in 1979. Other than the yield curve, Gundlach said leading economic indicators have been flashing contractionary signals for a long time, especially manufacturing. 'Double top?' Gundlach pointed out that the S & P 500 has almost returned to its record level set in January 2022, forming a "double top" price chart. "We are almost exactly two years later on, basically at the same place. I think that this looks like a pretty lousy trade location to own stocks," Gundlach said. A double top is a bearish technical reversal pattern that forms after an asset reaches a high price two consecutive times with a moderate decline between the two highs. At the end of 2023, after a 24% rally, the S & P 500 was less than 1% from its all-time high of 4796.56 reached in January 2022. Gundlach said he has been favoring non-U.S. equities over domestic stocks for a few years, and a weaker dollar will make this trade more attractive in the future. "We're not really the world beater any longer and that might have something to do with all of our mismanagement, or our fiscal situation and the crazy policies that we've been putting in place in more recent years," he said. Gundlach said the greenback is losing its momentum and the S & P 500 should underperform its international counterparts in the next recession.