“The stock market can stay in very overpriced territory” as long as the Federal Reserve’s stimulus continues, says billionaire bond investor Jeffrey Gundlach, founder and CEO of $137 billion DoubleLine Capital.
Gundlach, dubbed the “Bond King,” told Yahoo Finance Live on Monday that although U.S. stocks are expensive, bonds appear to be undervalued.
“[As] overvalued as stocks are relative to historical measures — like the price-to-earnings ratio, or Dr. Shiller’s CAPE ratio, or price-to-book and all that sort of stuff — as overvalued as they look by historical measures, they still are cheaper than bonds, treasury bonds. And that’s one of the things bolstering the U.S. stock market in addition to the stimulus and the economy,” he said.
The 61-year-old bond investor claimed that the Federal Reserve is “behind the scenes” using quantitative easing to “manipulate interest rates lower at the long-end.” Even though inflation has been rising, he said that the 30-year Treasury bond “looks like it can’t move above 2%.”
Bonds, according to Gundlach, are expensive when compared to traditional benchmarks like inflation, economic growth, and alternative indicators like the gold-copper ratio. According to Gundlach, compared to economic and inflation fundamentals, the 10-year Treasury “should be at least 100 basis points, if not up to 200 basis points higher than it is.”
To demonstrate the market’s reliance on the Fed, Gundlach pointed out that the market capitalization of the S&P 500 (GSPC) split by the central bank’s balance sheet has remained “nearly constant” over the last decade.
“It’s almost like a law of physics, it feels like, market physics anyway. So as long as the Fed is expanding its balance sheet, there’s a tailwind behind the stock market. And, so, I think that’s one of the reasons you’re going to those new highs is the bonds are so overvalued.”
From an investment perspective, DoubleLine allocated to European equities for the first time in about a decade earlier this year. He noted that the European equities and U.S. stocks, which had been outperforming, have been trading in “lock-step” since mid-2020. What’s more, European equities have a much cheaper price-to-earnings ratio.
While Gundlach had been bullish on the U.S. dollar in the past several months, it’s “just a tactical move.” He believes the dollar will “fall sharply’ in the longer run.
“Historically, when you run massive budget deficits and simultaneously expanding trade deficits, it’s very highly correlated to dollar weakness. What we’re in right now appears to be a countertrend move that may be nearing its end as we move into the end of 2021,” the investor noted.
Source: Yahoo News