Jeffrey Gundlach, co-founder of $64 billion investment firm DoubleLine Capital, said the U.S. economy may grow at a slower rate than economists expect this year, as falling oil prices hurt investment and hiring in the energy industry.
While cheaper oil fueled growth in the final months of 2014, the decline has a “sinister” side that will ripple through the economy and prompt downward revisions to forecasts by the middle of the year, Gundlach said in a webcast. Stock markets may not continue their rally and yields on 10-year Treasurys may go lower before rising again, he said.
Gundlach joins Bill Gross, Pacific Investment Management Co.’s co-founder and former chief investment officer, in cautioning that falling oil prices aren’t just positive for the U.S. Gross said this month that the Federal Reserve’s ability to raise interest rates is limited by the drop in oil, and that prices for many assets may decline this year.
Gundlach said the Fed may still raise interest rates this year if employment reports remain strong. That will help strengthen the U.S. dollar, while causing another headwind for stocks, he said.
“It looks to me like the dollar’s headed higher,” he said. “I know it’s a crowded trade. I’m as uncomfortable as everybody else in a trade that’s this crowded. It just seems to me the fundamentals underneath the dollar remain strong.”
Dollar Rally
The dollar has surged in the past six months, with the Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major peers, reaching 1,147.54 last week, the highest in data going back to 2004. The currency is gaining as the U.S. remains the bright spot in a lackluster global economy.
The World Bank this week cut its forecast for global growth this year, as an improving U.S. and low fuel prices fail to offset disappointing results from Europe to China. The world economy will expand 3 percent in 2015, down from a projection of 3.4 percent in June, according to the lender’s semiannual Global Economic Prospects report, released Jan. 13.
The report added to signs of a growing disparity between the U.S. and other major economies while tempering any optimism that a plunge in oil prices will boost output. Risks to the global recovery are “significant and tilted to the downside,” with dangers including a spike in financial volatility, intensifying geopolitical tensions and prolonged stagnation in the euro region or Japan.
‘Bottom Fishing’
Treasury 10-year yields matched the lowest in 20 months as a slump in crude oil and commodities prices damped the outlook for inflation. Treasurys have gained 1.6 percent this year, after returning 6.2 percent last year, the most since 2011, according to Bloomberg U.S. Treasury Bond Index.
Gundlach said investors should avoid “bottom-fishing,” or buying oil assets in expectations that prices may not fall further, because oil may not go up any time soon. Being a contrarian in commodities is “dangerous,” he said.
Last year, Gundlach correctly bet that bond yields would fall as pension funds shift to bonds from stocks, even as the Fed began tapering its bond buying. He sold cash and added Treasurys and government-backed mortgage-backed securities with longer durations to DoubleLine Total Return.
Gundlach’s $41.6 billion DoubleLine Total Return Bond Fund returned 6.7 percent last year to beat 91 percent of peers, according to data compiled by Bloomberg. Over the past three years, it’s beaten 93 percent of comparable funds.
Gundlach predicted that volatility in financial markets will increase “substantially” this year, after almost six years of rising stock markets. Measures of price swings in equities and fixed income have surged in recent weeks, as U.S. oil has fallen to about $46 a barrel, the lowest price since April 2009.