DoubleLine Capital CEO Jeffrey Gundlach, otherwise known as “The Bond King” in the capital markets space, said the S&P 500 will hit new lows as a bear market puts a stranglehold on the index.
“I’m pretty sure this is a bear market,” Gundlach told CNBC. “We’ve had pretty much all of the variables which characterize a bear market.”
The index is down just under 3 percent year-to-date and 3.71 percent within the past month. In the last three months, its performance–down 10.31 percent– speaks to the mass of sell-offs occurring in U.S. equities as rising interest rates and trade wars have sparked a flight from stocks and into safe-haven assets like bonds.
Gundlach correctly predicted that once benchmark Treasury yields hit the 3 percent mark, U.S. equities would come tumbling down and they did just that. In October, the S&P 500 shed 5 percent, rebounded 1.68 percent in November and is down 5.98 percent thus far in December.
Fed ‘Shouldn’t Raise Them (Rates) This Week’
The Federal Reserve is set to decide on interest rates on Wednesday as the capital markets are poised for what could be a fourth and final rate hike for 2018. The central bank has been sounding increasingly dovish as of late, which could mean that less rate hikes than anticipated for 2019–something that could help give U.S. equities a much-needed boost following the last two months of volatility–a perfect backdrop for a year-end rally.
The bond markets have been decrying the potential of more rate hikes, citing the possibility of an inverted yield curve as the smoke signal for a possible recession.
“I think they shouldn’t raise them this week. The bond market is basically saying, ‘Fed you’ve got no way you should be raising interest rates.’ Look at the twos, threes, five-year part of the yield curve, which are flat at 2.7 percent,” Gundlach said. “The problem though isn’t that the Fed shouldn’t be raising rates. The problem is that the Fed shouldn’t have kept them so low for so long.”
Floating Rate ETFs
With the possibility of a forthcoming rate hike, bond investors can incorporate fixed-income exchange-traded funds (ETFs) into their portfolios that can adjust with or nullify the impact of rising rates. While bonds with floating rate notes are the typical go-to for fixed-income investors, it is also helpful to opt for short duration debt to minimize exposure to interest rate risk.
ETFs to consider include the SPDR Bloomberg Barclays Investment Grade Floating Rate ETF (NYSEArca: FLRN) and the iShares Floating Rate Bond ETF (BATS: FLOT). The floating rate allows investors to capitalize on any short-term interest rate adjustments in accordance with monetary policy.
FLRN seeks to provide investment results that correlate with the price and yield performance of the Bloomberg Barclays U.S. Dollar Floating Rate Note < 5 Years Index, and limits duration exposure with investments in debt securities with maturities that don’t exceed five years. FLOT also seeks to track the investment results of the Bloomberg Barclays US Floating Rate Note < 5 Years Index, and invests in the component securities of the underlying index and may invest up to 10% of its assets in certain futures, options and swap contracts, cash and cash equivalents, as well as in securities not included in the underlying index.
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