Billionaire bond investor Jeffrey Gundlach, founder and CEO of $135 billion DoubleLine Capital, says, "the Fed has been manipulating markets for a long time," and on top of that, valuations have crept up thanks to "incredible amounts" of stimulus.
"We've had a relationship between the Fed growing its balance sheet and the value of the S&P 500 (^GSPC) that's been in place for years now ever since they started quantitative easing, and it's almost like a law of physics. It's like if you take the capitalization of the S&P 500 and you divide it by the Fed's balance sheet, it looks a lot like a constant," Gundlach said in a wide-ranging interview with Yahoo Finance from the firm's investor days.
The 61-year-old bond investor added that even though the stock market is high by historical comparisons, it looks below average in terms of its valuation versus bonds, which have a very low yield relative to inflation, Gundlach explained.
On Wednesday, the Bureau of Labor Statistics reported that the Consumer Price Index (CPI) jumped 0.8% in April compared to March, well ahead of economists' expectations. Excluding food and energy, core inflation rose 0.9% last month, the largest monthly increase since 1982. Moreover, on a year-over-year basis, headline consumer prices surged by faster-than-expected 4.2% in April, the largest gain since September 2008.
The latest CPI print was higher than DoubleLine predicted. Gundlach said DoubleLine Capital's model suggests inflation "is probably going to go higher in the next couple of months" and might peak in July.
"If we keep going higher from there, then I think people are going to be seriously worried because the concept of transitory has everything to do with what they call the base effects," Gundlach said.
Gundlach later said he believes "we're one really bad day away from going to a new high yield on the 30-year" Treasury bond, where yields have been creeping up in the face of the recovery. "I think that that's something to watch out for as a risk factor."
In terms of opportunities, Gundlach, who had been "very bullish" on commodities, said they "look overextended."
"I think we're going to be taking a pause in the short term, probably, on commodities," he said.
Gundlach thinks the U.S. dollar "might have a little bit of strength for the rest of the year."
Since January, the bond investor's recommendation he's held floating-rate corporate debt, like bank loans, like the Invesco Senior Loan (BKLN) ETTF.
BKLN was "having nothing but outflows during 2020 because people thought interest rates were going to be at zero for the rest of their lifetime, but now they're starting to factor in the idea that maybe interest rates even on the short end will ultimately go up. And the bank loans actually yield about the same as longer duration or longer maturity below other investment-grade credit. So I kind of like that."
DoubleLine also recently purchased European stocks for the first time.
"We never owned any European stocks. We hated them. We didn't like their negative interest rates. We thought they're all kinds of structural problems in the eurozone."
DoubleLine's longer-term view is for the dollar to move lower, which will bode well for European equities.
"They've performed this year exactly the same or slightly better than U.S. stocks. That's another one of these trends that seems to be changing. Just like the Nasdaq (^IXIC) is no longer outperforming the S&P 500, suddenly, non-U.S. stocks are not lagging anymore. They are in Japan and in China, but not in Europe. Europe is actually slightly outperforming. That's another sigh.
While it's still too early, Gundlach likes emerging market equities in the longer term.
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