Jeff Gundlach Warns of a Summer Correction
Jeffrey Gundlach, CEO of DoubleLine Capital is not bullish. Gundlach expects a massive deflation on Wall Street. He sees a stock market crash coming as early as this summer. Interestingly, Gundlach sees a stock market crash in 2017 as happening in the United States. (Source: “Jeff Gundlach sees summer correction in the stock market,” CNBC, May 2, 2017.)
This is surprising because, by most accounts, the U.S. economy, fragile as it remains, has still performed better than others. By most accounts, jobs and economic growth figures are still better in the United States than in Europe. The problem is that the U.S. markets have gotten ahead of themselves. Rather, they have gone too high relative to the actual state of the economy.
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Gundlach suggests that the U.S. economy isn’t performing as well as Wall Street valuations would like us to believe. President Donald Trump campaigned, promising to boost GDP growth to four percent. Once settled into the White House, the Trump administration deemed it more prudent to set a target of three percent. The actual figure so far this year has been, by U.S. standards, a rather lackluster 1.7%.
Investors will start to look for safer, if not as remunerative, assets to manage this risk. This process will likely prompt the coming stock market correction. Meanwhile, this trend runs counter to the Fed’s policy of raising its key interest rates. The effect could be contrary to the desired one. Inflation is not rising, but economic growth simply hasn’t matched expectations. The Fed, therefore, could end up stunting growth rather than encouraging it.
Indeed, the economic trend could lead to further monetary easing conditions. In other words, it would run counter to the tightening desired by the Fed. In turn, that would signal a lack of confidence in economic growth, resulting in a confirmation of the many stock market crash predictions such as those from Gundlach.
In line with his view about an imminent market correction, Gundlach, not surprisingly, has advised traders and speculators to increase liquidity today (literally). He wants you to hold more cash. (Source: “Jeff Gundlach sees trouble, says traders should raise cash ‘literally today’,” CNBC, June 13, 2017.)
To be sure, the DoubleLine Capital market expert has not mentioned the dreaded word: recession. But he does have clients to look after, and that’s a dangerous call to make. Yet, from the point of view of analysts and observers, who have fewer interests at stake, there’s every reason to fear that a market correction this summer could spark another recession, given the current economic fundamentals.
Gundlach’s opinion is based on volatility. He still sees it as low, based on the VIX chart below.
Chart courtesy of StockCharts.com
But the macro economic and political climate suggests volatility, in terms of overall risk, is extremely high. Indeed, even leaving geopolitics aside, the Washington establishment is trying to hurt Donald Trump, letting him waste time and hindering his pro-growth and pro-companies agenda in all possible ways. (Source: “Gundlach Says D.C. Establishment Wants to ‘Wait Trump Out’,” Bloomberg, June 13, 2017.)
