Gundlach’s 2022 Forecast: Equities are Expensive but Cheap Relative to Bonds

Monetary policy has driven U.S. stock prices to excessive valuations, according to Jeffrey Gundlach. But they remain cheap relative to bonds.

Gundlach is the founder and chief investment officer of Los Angeles-based DoubleLine Capital, a leading provider of fixed-income mutual funds and ETFs. He spoke to investors via a conference call on January 11. Slides from that presentation are available here. This webinar was his annual forecast for the global markets and economies for 2022, and its title was, “I Feel Young Again.”

The title related to the late 1970s, when Gundlach was in the third grade, inflation was high and real rates were negative. The difference, of course, is that rates are much lower now than then.

Before we look at Gundlach’s 2022 predictions, let’s see how well his forecast from last year, which I reported on here, held up:

  • U.S. equities will underperform the rest of the world – U.S. equities, based on the S&P 500 ETF SPY, returned 28.6%. The rest of the world, based on the MSCI all-world ex-U.S. ETF ACWX, returned 7.46%. Incorrect.
  • Inflation will rise – Inflation, as measured by growth of the CPI-U index, was 1.4% in 2020 and 6.8% for the first 11 months of 2021. Correct.
  • Volatility will be higher – Volatility, as measured by the average VIX closing price, was 29.25 in 2020 and 19.67 in 2021. Incorrect.
  • The dollar will weaken – The dollar, as measured by the DXY, was at 89.93 at the close of 2020 and at 95.97 at the close of 2021. Incorrect (although, in fairness, Gundlach has always stated that the weakening of the dollar is a long-term, not short-term prediction.)
  • He was “neutral” on gold – Gold, based on the ETF GLD, returned -4.15% in 2021. Correct.
  • The yield curve will steepen – The yield curve, based on the spread between two- and 10-year Treasury bonds, was 80 basis points at the end of 2020 and 79 basis points at the end of 2021. Rates overall were high, however, as Gundlach predicted. Tie.
  • Bank loans were his number one recommendation and they earned 5.2%. Correct.
  • He was bullish on commodities, and those did well, led by oil, which returned 59.7% based on the WTI index. Correct.

That is four correct, three incorrect and one tie.