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Jeffrey Gundlach

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Gundlach: Recession Will Crush ‘Magnificent 7’ Stocks in 2024

By Dinah Wisenberg Brin

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What You Need to Know

  • Gundlach expects a recession by the second quarter of 2024.
  • He's worried about a higher-for-longer interest rate stance.
  • He recommends an equal-weighted basket over cap-weighted and manufacturing over financials.

DoubleLine Capital CEO Jeffrey Gundlach, predicting a U.S. recession by the second quarter of 2024, indicated Tuesday that investors should move away from the seven big stocks that have led this year’s market rally.

He suggested investors concentrated in the “magnificent seven” tech stocks — Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia, and Tesla — are playing with fire.

“They will obviously be the worst performers in the upcoming recession. Whatever is leading the charge going into the economic downturn invariably must lead the charge on the way down,” he said at the Yahoo Finance Invest conference, per a video replay. “So I would get out of them. I would go into an equal-weighted basket as opposed to a market-weighted basket.”

The DoubleLine founder had other specific stock suggestions, saying he would move away from the U.S. banking system.

“The banks are losing a ton of money. One large bank in America — I won’t name their name — but they’ve got about $1 trillion investment portfolio and it’s kicking off 3%,” but the borrowing cost at the Fed is over 5 and 3/8, he noted, “so you want to stay away from all of these things that are debt based.”

“So I would go for manufacturing as opposed to finance,” Gundlach said. He suggested it was time to start gradually diversifying into non-U.S. equities on a dollar-cost-averaging basis.

“In particular, I would start thinking about emerging markets once the dollar index starts to fall, which has not happened yet. But it’s going to happen in the next recession,” he said.

Investors preparing for a 2024 recession also should upgrade in credit quality, which already is working, he suggested. “Bonds have done really well over the past week. Stocks have done well, too, because they needed bonds to do well to kind of stop falling, which happened over the last few months.”

If the U.S. economy isn’t already in a recession, it will probably enter one by the second quarter next year, Gundlach predicted. He noted the Treasury bond yield curve has been inverted and now is deinverting — a recessionary signal — and that the unemployment rate is above its 12-month moving average and consumer confidence is deteriorating.

Interest Rate Worries

Gundlach voiced concern over what he sees as the Federal Reserve’s “higher for longer” stance on interest rates, and said he expects that after interest rates fall in reaction to weaker economic growth, they may rise again in an inflationary response to the country’s fiscal situation.

“I think they’ll either stay higher for longer, which is their rhetoric, and I hope they don’t. Or the economy will noticeably weaken, and they’ll do what they always do, and that is cut interest rates much more rapidly than they raise them. I like to use the phrase the Fed takes the stairs up and the elevator down when it comes to interest rates,” he said.

The interest expense on the national debt is exploding vertically because the bonds issued earlier at low interest rates, before the Fed started its aggressive rate-hike program, are ‘rolling off with great speed,’” Gundlach explained.

“Already the interest expense since the Fed started raising interest rates has gone up by hundreds of billions of dollars, almost half a trillion dollars per year, and it’s going literally vertical,” he said.

About $17 trillion of the bonds in the national debt come due over the next 36 months, “so that means that if we keep interest rates higher for longer, these bonds that yield sort of 1% or 2% are going to be reissued at 300 basis points or more higher interest rates. And on $17 trillion, that’s another $500 billion. So we have a massive problem that’s coming,” the billionaire investor said.

“And this is happening also to small businesses who used to pay 4%, and now they’re paying 9% or even 12%,” he said. “A lot of people can bridge a gap of temporary inflated interest expense, but not if we’re going to be higher for longer.”

Photo: Bloomberg

Dinah Wisenberg Brin

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