The selective benchmark of the US stock market, the S&P 500, has recorded its worst trading day in two years this week. Specifically, on Tuesday it closed with a decline of 4.32% after , increasing the chances that the Federal Reserve will increase interest rates even more at its meeting next week. But the worst is yet to come, according to Jeffrey Gundlach, known as the “bond king.”
Gundlach, who is CEO of DoubleLine Capital, believes that the US index will continue to decline until mid-October, even another 20%, due to a weakening of the country’s economy and the restrictive monetary policy of the central bank. “I think you should start positioning yourself more bearish,” he declared in an interview with CNBC. In this aspect, the investment guru places the selective in the area of 3,000 points.
However, Gundlach does believe there are opportunities in both emerging market equities and fixed income, in which he is an expert. “He buys long-term Treasuries, because the risk of deflation—even though the current narrative is exactly the opposite—the risk of deflation is much higher today than it has been in the last two years,” he recommended. .
In this regard, the ‘king of bonds’ adds to a warning that other leaders in the investment world have already made. The CEO of ARK Invest, Cathie Wood, that the decline in prices is just around the corner, as evidenced by the sharp declines from highs in some commodities such as precious metals or crude oil. Wood already noted last week that the Fed is looking only at lagging indicators like employment and core inflation, while leading indicators like gold are already pointing to lower prices.
Gundlach, however, doesn’t think deflation will happen immediately and is looking at the end of 2023, so he advises buying long-term debt from now on. If the price boom starts to slow down, the Fed will slow down its restrictive rate hike policies, so bond prices will rise.
The yield on the US 10-year bond has been continuously exceeding 3% since the end of August, while the 30-year bond has beaten that yield for more than a month.
The FOMC (Federal Open Market Committee) of the US will meet next week to decide on its new measures to curb prices that continue to rise. The market is expecting another 75 basis point hike, although some believe the figure could be as high as 100 basis points. It would be the fifth rate hike this year, with an increase from 0% in March to the range of 3% – 3.25% if the increase is 75 points.
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