Gundlach fears a recession. Here are his low-risk, income-generating investment picks.

The widely followed CEO, chief investment officer and founder of DoubleLine Capital, spoke to UBS for a podcast that was recorded on Sept. 19, ahead of last week’s Fed meeting. At the time, Gundlach predicted that the Fed would take a wait-and-see attitude — it kept interest rates steady in a range between 5.25% and 5.5%, but flagged another hike to come, which has been a primary driver of the recent surge in yields.

The money manager said he sees a “turning point maybe in the next six months or so where the consumer…is going to be tapped out. I think they’ve been borrowing too much money. I think the interest rate increases are really going to start biting both the consumer and small businesses.”

Gundlach says “the odds of recession in the first half or the second quarter of 2024 really needs to be respected,” and expects layoffs will pick up toward the end of this year and into early 2024.

And with recession odds “high,” he said it’s “pretty difficult to be really fond of the valuation of the stock market.”

So where to invest? “I think investors should be getting much more conservative and I continue to favor a relatively balanced portfolio. When I say that I don’t mean 60/40, I mean maybe about 25% or 30% equities and the same quantity or slightly more bonds,” he said. “And at this point, a lot of people are using the phrase ‘T bill and chill,’ because the highest yield out there is six-month T-bills.”

But investors are “better off in…parts of the credit market where there are yields available [of] 7% to 8%, without taking a lot of credit risk,” he said.

Drilling down, Gundlach says he’s shifted from low-quality to more high-quality bonds for around 25% of the portfolio. “I would say about 25% in 10-year longer Treasury bonds, certainly because they have potential to be a ballast [for] your portfolio against some positions,” he said

“I don’t recommend high-risk positions at all right now. I recommend some risk positions, so 25% longer-term Treasurys where if you have that recession coming,” and that could mean gains of 30% to 50% on the 30-year bonds and half of that or so on 10-year bonds.

Gundlach weighs in on cash, where he differs from Bridgewater Associates’ Ray Dalio who recently said cash is temporarily good and that he doesn’t want to own bonds,

“I used to say 25% cash, but now I don’t think cash is where you want to be. I think it’s cash-ish,” he said, suggesting low-duration bonds or floating rate bank loans that can yield around 8%. “You can get income out of double B type or triple B fixed income of 7.5% – 8% and sleep at night very, very well.”

“And then I would say 25% in stocks, and there I don’t think you want the entire S&P
SPX
[so-called magnificent] seven that have driven the entire S&P year to date. They seem back in euphoria land,” he said.

Read: A handful of stocks have driven much of this year’s rally. That’s becoming a serious problem on the way down.

For stocks, he prefers value over growth, and midcap or large-cap over small-cap. And within that exposure to international stocks, just not Europe or emerging markets yet, because the latter’s currencies are weak and probably won’t rally until a recession hits. But he likes India for a “generational type of a hold.”

And then 25% into commodities, and he suggests gold or exposure to a broadly diversified commodity price index.

“So it’s a really balanced portfolio with a lot of it being in fixed income, you know, 25% in treasuries and 25% in credit, so half of the portfolio would be income generating, and that’s our portfolio. You put it together you get like 7%,” said Gundlach.

The markets

Stock futures
ES00,
-0.52%

NQ00,
-0.54%
are under pressure, as the 10-year Treasury yield
BX:TMUBMUSD10Y
hit a fresh 16-year high. Oil
CL.1,
-0.71%
is lower, while the dollar
DXY
is off modestly.

Read: Oil could hit $150, sending ‘shock through system,’ says top shale CEO

And: Why a government shutdown could undercut the U.S. dollar rally

For more market updates plus actionable trade ideas for stocks, options and crypto, subscribe to MarketDiem by Investor’s Business Daily.

The buzz

Costco
COST,
+0.01%
earnings are due after the close, with potential news of a membership-fee increase in the spotlight.

Ford
F,
+1.21%
has halted work on a $3.5 billion battery factory in Michigan, just days after making concessions to striking workers. And President President Biden is expected to join United Auto Worker picket lines on Tuesday.

On the data front, the S&P Case-Shiller home price index is due at 9 a.m., followed by new home sales at 10 a.m. and consumer confidence. Fed. Gov. Michelle Bowman will speak at 1:30 p.m.

Moody’s has warned a government shutdown would be credit negative for the U.S. From the postal service to social security, here are some potential fallout scenarios.

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The chart

Mark L. Newton, head of technical strategy at Fundstrat, says in a new note that Monday’s bond yield surge “should result in a final push back to monthly lows in gold and silver. Yet, given that Treasury yields and the U.S. dollar look close to peaking out technically, this might serve as an attractive countertrend opportunity to give the precious metals a more serious look.”

His technical gold
GC00,
-0.39%
target is $1,865-77, with break of $1,865 possibly leading to $1,850 — an appealing risk/reward area, he says. If gold climbs over $1,960, that means lows are likely in place. In any case, he sees another breakdown for the metal in the next 1 to 2 weeks, though this time it’s fair to see gold is “close to bottoming.”

Here’s his chart:

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