Jeffrey Gundlach, CEO of DoubleLine Capital, is cautioning investors about a potential recession. Gundlach believes that the bond market is sending a warning sign, specifically pointing to the tightening spread between the 2-year and 10-year Treasury yields. He notes that this “de-inverting” of the yield curve could be a tell-tale sign that an economic downturn is imminent. Gundlach took to social media to express his concerns, stating, “Should put everyone on recession warning, not just recession watch. If the unemployment rate ticks up just a couple of tenths it will be recession alert. Buckle up.”
This warning comes as Bill Gross, the renowned bond investor, suggests that the surging 10-year Treasury yield could potentially test 5%. These indicators in the bond market have raised concerns among investors and economists, as they historically serve as reliable recession predictors.
In addition to the bond market’s warning signs, both stocks and bonds sold off on Tuesday, leading to a decline in the 60/40 portfolio. The iShares Core Growth Allocation ETF, which reflects a portfolio allocation of 60% equities and 40% fixed income, dropped 1.14%. The portfolio has experienced a total return of -15.6% in 2022, as both stocks and bonds have declined sharply. However, experts emphasize that a difficult day or year in the market does not necessarily negate the long-term prospects of the 60/40 model. This portfolio is designed to provide investors with diversification and mitigate price volatility.
Furthermore, Cal-Maine Foods, an egg distributor, experienced a nearly 12% drop in its stock price after posting weaker-than-expected financial results. The company cited “dynamic” market conditions and normalization of egg prices as reasons for the underwhelming performance.
Meanwhile, the Dow Jones Transportation Average closed below its 200-day moving average for the first time since June, signaling a potential downtrend. This decline comes as stocks sold off broadly and bond yields surged. Thirteen out of the twenty stocks in the index are now below their 200-day moving average, raising concerns among market technicians about further declines.
Additionally, the chance of a quarter-point increase in the Fed’s benchmark interest rate at the next policy meeting rose to 30.9% from 16.4% last week. This increased probability is attributed to stronger-than-expected job opening numbers reported by the Bureau of Labor Statistics.
Despite these warnings and market fluctuations, stock futures traded near flat Tuesday night. Dow futures slipped by around 0.1%, while S&P 500 and Nasdaq 100 futures remained marginally below flat.
These developments in the bond market, stock market, and economic indicators have raised concerns among investors and economists about the potential for an upcoming recession. As uncertainties persist, market participants are advised to remain vigilant and closely monitor these warning signs.