What’s Obvious is Obviously Priced In

Given the current state of the market, many investors that I am speaking with are considering changes to the “what has worked before” approach.

When I am looking for guidance on the complex macro environment, I often turn to Jeffery Gundlach, CEO of DoubleLine Capital, LP. I have asked DoubleLine to open the FOX Spring Investment Forum in San Francisco on March 13 and present their views on this complex environment. Jeff laid out his thoughts in a recent DoubleLine newsletter, Thought Leadership, released on January 9, 2018. He has been exceptionally prescient in the past years, and his mantra at the start of the year is: “What’s Obvious is Obviously Priced In.”

-Kristi Kuechler, President, FOX Private Investor Center^TM

 

• The dichotomy in policy between the Fed and the ECB despite nominal GDP being about the same at 4.1% and 4.3%. The Fed has raised rates five times and plans for three more this year while embarking on quantitative tightening. Come October 2018, the U.S. will have $600 billion of increased annual bond supply from QE roll‐offs. This will be on top of the tax package which will scoop an estimated $280 billion of revenue out of the Treasury, a growing deficit with increased infrastructure and military spending and compounding entitlement spending. The U.S. could be looking at a potential deficit of $1.3 trillion by Fiscal 2019 and $1.9 trillion of U.S. government bond supply. Maybe that’s one reason why the curve has stopped flattening and yields started rising.
• Meanwhile, the ECB maintains negative interest rates and promised quantitative easing of $30 billion a month through September. It’s strange they’re not a little bit more aggressive about bringing forward tapering given they’ve upgraded economic growth. One of the things that’s not obvious or priced in and may surprise markets would be a more hawkish ECB. A change in rhetoric could be the catalyst to higher yields in Europe.
• For now, the euphoria of “goldilocks” and “nirvana” for global stock markets, largely correlated with central bank bond buying, continues. Only problem with nirvana is it means things can’t get better. It might be priced in and maybe that means surprises will be to the downside.
• The U.S. shares this euphoria, not because of bond buying, but because every leading economic indicator is at local highs: PMI, Small Business optimism, factory orders, Consumer Confidence and CEO Confidence. If we go through 2018 with four quarters of growth, it will be the longest expansion in history. There is no recession in sight, but if these strong indicators are obvious, isn’t it obviously priced in?
• But U.S. stock markets continue their magic. The S&P 500 has tied its longest stretch without a down year. Nine years in a row now, with 19x PE on forward–projected consensus earnings which has only happened twice before in history: 1928‐1929 and 1998‐2000. This feels a lot like the dot.com boom with the current Bitcoin mania. My prediction for 2018 is the S&P 500 will have a negative rate of return. It may go up the first part of the year, but I believe when it falls it will wipe out the entire gain. Core CPI could be a real shocker if it moves to the upside and we’re starting to see wage inflation with the small business survey giving a blowout reading on wages/compensation.

-Jeff Gundlach, CEO, DoubleLine Capital, LP

To see the full agenda for the 2018 FOX Spring Global Investment Forum, click here.