Bond king Jeffrey Gundlach warns that stocks could be in trouble. And last week ended with interest rates triggering a sell signal in the stock market, under his view.
He believes higher interest rates are bearish for stocks. Specifically, he said if the 10-year treasury yield rises above 2.63%, it could start to hurt equities.
On Friday, the 10-year treasury rate was at 2.64%.
But, as the chart below shows, 5% is more significant for stocks.
Long-term investors remember when 5% was a low yield on 10-year Treasuries. The rate was above that level from 1967 until 2002. And stocks gained more than 1,000% over that time.
So, it’s possible to have a long bull market with higher interest rates. But it is likely stocks will stumble when interest rates get “too high.”
It’s just unlikely 2.63% is too high. Individual investors don’t really track interest rates to the one-hundredth of a percentage point anyway. They think in round numbers.
The 5% level is where rates become attractive to stock market investors. That’s where investors believe they get a decent return on bonds, and that’s where stocks will struggle.
Gundlach is a great investor. He’s the CEO of DoubleLine Capital. His firm manages about $119 billion in assets, and he consistently ranks among the top performers.
And he is getting headlines for saying 2.63% is the important level. But he acknowledged that stocks are likely to move much higher before they fall.
Recently, he said: “My prediction for 2018 is that the S&P 500 will have a negative rate of return. It may go up 15% in the first part of the year, but I believe when it falls, it will wipe out the entire gain of the first part of the year and end with a negative sign in front of it.”
Investors need to remember that now is the time to benefit from the rally instead of worrying about a decline.
Michael Carr, CMT
Editor, Peak Velocity Trader
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