Jeffrey Gundlach, nicknamed the ‘bond king’ and the CEO of DoubleLine Capital, is betting against the stock market for the second time in two months. This is after his initial short position paid off handsomely when the market saw a collapse in March.
Gundlach started betting against the stock market in February, and cashed out on March 18, saying “the profits were just too great to not harvest, and the panic is palpable.”
He’s now betting against the market for a second time, believing that the true magnitude of job losses hasn’t been priced in yet and we’ll soon retest the March lows.
“I’m certainly in the camp that we are not out of the woods. I think a retest of the low is very plausible. I think we’d take out the low.”
Gundlach made the comments during an appearance on CNBC yesterday and added that investors are too optimistic about the economic recovery from the coronavirus pandemic.
“People don’t understand the magnitude of … the social unease at least that’s going to happen when … 26 million-plus people have lost their job,” Gundlach said. “We’ve lost every single job that we created since the bottom in 2009.”
His second short position against the market may not be as large as his February bet, but Gundlach sees a very appealing risk-reward setup.
“Actually I did just put a short on the S&P at 2,863. At this level, I think the upside and downside is very poor. I don’t think it could make it to 3,000, but it could. I think downside easily to the lows or beyond. I’m not nearly where I was in February when I was very, very short,” Gundlach added.
Will the Market Collapse?
While Gundlach doesn’t provide a timeframe for when he expects the market to retest the March lows, another investor says he thinks it will happen soon.
Jim Bianco, president of Bianco Research, says he thinks it’s just a matter of weeks until the S&P 500 drops back to 2,200 level and retests the March lows.
He believes there are two critical data points to watch that will signal when the retest happens.
The first is the online reservation system for restaurants called OpenTable. Once the shutdown orders are lifted, Bianco will monitor the number of reservations to see if Americans are comfortable leaving their homes and being in public, a signal the economic restart is going well.
The second indicator is Apple Mobility, which will show that people are back on the road and traveling.
Separately, Bianco is watching to see how quickly the 26 million Americans that have filed for unemployment insurance get back to work. By looking at the continuing claims numbers, he gets an idea of how many of those 26 million remain jobless.
He believes that if 20 million Americans still haven’t returned to work by mid-summer or into the fall, that will kill any hopes of a quick economic recovery.
Bianco points out that during the Great Recession, the country still had an employment rate of 90% and the economy was operating at 96% of peak activity.
“You need to be at 98%, back to close to replicating complete activity pre-virus. That is why for mobility and restaurant data, if we don’t see that stuff get close to 100% across the board, in lots of things, those are signs we’ll have real problems with the economy,” he says.