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- 1- Copyright 2014, Advisor Perspectives, Inc. All rights reserved.

GundlachsForecastfor2014ByRobertHuebscher

January21,2014

Inhis30yearcareerasafixedincomemanager,JeffreyGundlachhasneverseena

forecastassolidifiedacrosseveryassetclassasistheconsensusfor2014.Investors

expectstockstooutperformbonds,goldtobealoser,commoditypricestohead

lower,domesticmarketstooutperformnonU.S.marketsandthedollartobestrong,

accordingtoGundlach.

Butmanyofthoseviewsarewrong,hebelieves.

Gundlachsprojectionshaveearnedhimareputationasacontrarianandsuccessful

investor.Gundlach,thefounderandchiefinvestmentofficerofLosAngelesbasedDoublelineCapital,

deliveredhis2014forecastinaconferencecallJan.14.

Theconsensusiswronginitsassumptionthatinterestrateswillrise,accordingtoGundlach.Idontthink

thatlongtermbondsaregoingtodoallthatbadlyontheyieldcurvebasis,hesaid.

HistalkwastitledTheYearoftheHorse:LettheRaceBegin!andtheslidesfromhispresentationare

availablehere.

Gundlachisrecognizedasaprescientforecaster.Forexample,heforesawthecollapseofthehousing

marketleadinguptothefinancialcrisis.Buthisforecastlastyeardidnotturnoutthatwell.Ayearago,he

saidhewouldnotbesurprisedifyieldswerelowerattheendof2013thantheywereatthebeginning.In

mid2013,hepredictedthe10yearyieldwouldbe1.7%bytheendoftheyear.Ityielded3.04%instead.A

yearago,hesaidU.S.equitiesofferedapoorriskreturntradeoffandpredictedthateconomicgrowth

wouldbeslow,volatilitywouldbehighandChineseequitieswouldperformwell.Noneofthosewere

accurate.However,hedidcorrectlypredictthepoorperformanceofTreasuryinflationprotectedsecurities

(TIPS),outperformanceintheJapanesemarkets.

LetslookatGundlachsforecastforFederalReservepolicy,variousfixedincomeassetsubclasses,stocks,

commoditiesandothermarkets.IllconcludewithwhathesaidaboutApplesstockandthenextbig,

disruptivetechnology.

Fedpolicy,interestratesandthefixedincomemarkets

Barringanysurprisesfromtheeconomyorspikesinbondmarketvolatility,GundlachsaidtheFedwill

continuetaperingandbeoutofthebondbuyingprogrambytheendoftheyear.

http://advisorperspectives.com/newsletters14/pdfs/3-0-Market_Outlook.pdfhttp://advisorperspectives.com/newsletters13/Gundlachs_Predictions_for_2013.phphttp://advisorperspectives.com/newsletters13/Gundlachs_Predictions_for_2013.phphttp://advisorperspectives.com/newsletters14/pdfs/3-0-Market_Outlook.pdf

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Mortgageratesareheadingup,Gundlachsaid,andthehousingmarketissofterthanpeoplethink.Data

suchas

existing

and

new

home

sales

and

housing

starts

are

off

their

lows

in

2009

10,

but

he

said

theyve

onlyrecoveredbacktolevelsthatusedtobecharacteristicofthedepthsofarecession.Demographics

andhouseholdformationarewildlyagainsttheconceptofhomeownershipgoinghigher,hesaid.

Municipalbondsareslightlyovervalued,hesaid.Investorswhoarewillingtotoleratevolatilitywillget

rewardedfortheriskinPuertoRicosbonds.Toomanypoliticiansrelyonvotestiedtothestabilityof

PuertoRicotoallowacrisisthere,accordingtoGundlach.PuertoRicosbondsaregoingtomakeittothe

othersideofthevalley,hesaid.

GundlachstilldoesntlikeTIPS,buthisdistasteforthemhaswanedastheirpriceshavefallen.Hewarned,

however,thatTIPSpricesarelikelytodecreasefurtherbeforeinflationsetsin,becauserealinterestrates

willrise

in

advance

of

aspike

in

inflation.

Stocks

Gundlachpointedtoanumberofominoussignsforthestockmarket.

Hedisplayedchartsshowingthattherunupinthestockmarkethasnearlyparalleledtheincreaseinthe

Fedsbalancesheet.Hesaidcontinuedtaperingmightmeanweaknessincrementallyforriskassets,

whichwouldtakeawaysupportforthestockmarket.

Margindebtdoesntgetenoughattention,Gundlachsaid,anditisataveryhighlevelnowconsistent

withlevelsattheprevioustwomarketpeaks.Youshouldwatchthemarginsveryclosely,becauseifit

hooksover

and

starts

heading

down,

it

removes

another

key

support

for

the

stock

market,

he

said.

TodaysbullishmarketsentimentreinforcesGundlachsbeliefthatstocksarenearingtheirpeak.

Evenmarkettechnicalslookbad,hesaid,withthestockmarketextremelyextendedaboveits200day

movingaverage.

TheaveragepriceoftheS&P500duringthesecondhalfof2013wasapproximately1,750,andGundlach

saidinvestorswillgetnervouswhenthepricedropsbelowthatlevel,asinvestorswhoweredollarcost

averagewillbeunderwater.

Abouteverythingthattendstocharacterizethevicinityofatopintheequitymarketseemstobein

place,he

said.

The

stock

market

is

at

best

fully

valued,

maybe

alittle

over.

Stockmarketvolatility,whichwasextremelylowin2013,islikelytoincrease.Gundlachsaidthisis

consistentwiththisbeingtheChineseyearofthehorse.

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Commodities,currencies,gold,Appleandthenextbigtechnology

Goldwillseeapriceofatleast$1,350atsomepointduringtheyear,Gundlachsaid.Itisnow$1,209.He

addedthathelikesgoldminingstocksasadiversifierwhichhasbeenhispositionforthelastcoupleof

yearsandasanoutrightpurchase.

Forothercommodities,Gundlachofferedonlyvaguepredictions. Itseemstomewearegoingtohaveto

seesomeformofvolatilityinthecommoditymarketduring2014,Gundlachsaid.Commoditiesaregoing

tohavetohaveamovethisyear.Imnotconvincedwhichwayitsgoingtobe,hesaid.

Foratleastthepastseveralyears,Gundlachhasfavoreddollardenominatedinvestinginemerging

markets,andheexpectsthedollartoheadhigherin2014.Thatcallisnowalignedwithconsensusviews,

althoughhe

said

that

as

recently

as

2012,

local

currency

emerging

market

funds

were

extremely

popular.

OnNov.7,2012,GundlachsaidApplestockwouldfallto$425.Atthetime,ittradedat$560pershare.By

thebeginningofMarch,Applehadfallentobelow$420.

Now,withApplebackto$541asofJan.17,Gundlachsaidhelikesitinaportfolio.Hesaidithasverylow

correlationtootherstocksandgeneratesalotofcashflow.Hesaiditmaygoto$600in2014,butits

unlikelytoexceedthatthisyear.

Gundlachconcludedthecallwithalongtermprediction:Threedimensional(3D)printingwillbeoneof

themostmonumentallytransforminganddisruptivetechnologies.Hesaid3Dprintingapplicationsextend

fromfabricatingautomobilereplacementpartstobuildinghomespotentiallyinlessthan24hours.

3Dprintingispartofanongoingtrend,Gundlachsaid.Aclassoflaborersisbecomingunemployableas

theirskillsarebeingreplacedwithtechnology.Investorpsychologyandinvestmentanalysishavenotfully

incorporatedthepotentialofthistransformation,accordingtoGundlach.

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