COVER STORY
What Bubble ?
S & P 500 Annual Returns
2023 26.29 % 2022 -18.11 % 2021 28.71 % 2020 18.40 % 2019 31.49 % 2018 -4.38 % 2017 21.83 % 2016 11.96 % 2015 1.38 % 2014 13.69 % 2013 32.39 % 2012 16.00 % 2011 2.11 % 2010 15.06 % 2009 26.46 %
Source : slickcharts . com strategist Jim Bianco , founder of the Chicago consulting firm named for him , raised eyebrows earlier this year when he told Bloomberg he thought the bond market could be dead wrong and that a surprisingly strong economy could send the 10-year Treasury bond yield back to near 5.50 %.
The huge fourth quarter rally in bonds priced in five or six rate cuts later this year ( it gave back some gains in January ), and Bianco calls these assumptions “ wildly optimistic .” In his view , investors should be thinking about rates headed higher later in the decade .
Like Bianco , Loomis Sayles ’ s vice chairman , Dan Fuss , says his team thinks the economy will remain resilient and avoid a recession . “ I don ’ t know how we get a rate cut in March unless the economy really falls off or a war breaks out ,” he says . And by a war , he ’ s referring to one that cuts off Saudi oil , not a continuation of the skirmishes proliferating across the Middle East .
Gundlach finds the economy weaker than many of his rivals do , but like Jim Bianco he anticipates a day of reckoning for the U . S . Treasury as it is forced to sell trillions in debt every year .
Even if it ’ s “ almost heresy ” for a longtime bond fund manager to say it , Fuss concedes he favors stocks “ slightly over bonds .” That ’ s because “ corporate spreads ” over Treasurys are “ so low I don ’ t see them staying that low .”
High-yield bonds have been a favorite at Bondbloxx , a fixed-income exchange-traded fund firm , especially as the business cycle turned buoyant in the face of recession expectations last year . JoAnne Bianco , an investment strategist at Bondbloxx , says conditions continue to be strong for high-yield issuers ; the firm doesn ’ t anticipate an increase in defaults this year .
One bond market participant who shares Dan Fuss ’ s and Jim Bianco ’ s skepticism about lower interest rates over the long term is Jeffrey Gundlach , CEO of DoubleLine Capital . But he ’ s also more negative about the economy in general . He says the leading economic indicators index has been misleading in the current cycle because it ’ s heavily weighted to manufacturing indexes , and these industries got very weak just as services industries like travel enjoyed booms , he said on a January webcast .
Unlike most institutional investors , Gundlach isn ’ t impressed with the strength of U . S . employment , which is already shrinking in many cyclical sectors . “ The labor market is the last to go ,” he said . “ Once [ unemployment ] goes up , it can go up pretty dramatically .”
It ’ s the national debt situation that has Gundlach ’ s attention , as $ 17 trillion , or about 50 % of the total , expires in the next 36 months . Many of those Treasurys were issued in the last five years with coupons of 1 % or less .
Gundlach finds the economy weaker than many of his rivals do , but like Jim Bianco he anticipates a day of reckoning for the U . S . Treasury as it is forced to sell trillions in debt every year . He believes a recession is closer , too . In the next one , the market isn ’ t going to see a bond rally , he predicts . The Fed will want to keep interest rates lower to keep interest expense under control , as interest is currently 15 % of the total federal budget .
“ Rates could go down to 3 %, but they won ’ t hold ,” he told webcast attendees , adding that we might see rising rates and an inflationary reaction to the next recession .
“ Medicare is projected to go bankrupt in eight years by their own trustees and Social Security in 10 years ,” Gundlach says . “ It ’ s our grandchildren ’ s problem or our children ’ s problem . It ’ s our problem .”
42 | FINANCIAL ADVISOR MAGAZINE | JANUARY / FEBRUARY 2024 WWW . FA-MAG . COM