Jeffrey Gundlach on the next downturn

Jeffrey Gundlach believes that if equities do well this year, emerging market equities will do better than US stocks (SPY) (DIA). If, on the other hand, equities don’t do well, we could see a repeat of the pattern in the fourth quarter of 2018, where emerging market stocks (EEM) went down less than US stocks (QQQ), which happened even without a weaker US dollar (USDU) (UUP).

Gundlach Predicts What the Next Downturn Will Look Like

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Emerging markets versus developed markets

Chinese stocks (JD), Alibaba (BABA), and Tencent Holdings (TCEHY) are up 46.1%, 37.8%, and 27.2%, respectively, year-to-date, outperforming the US markets. The S&P 500 Index (SPY) and the NASDAQ Composite Index (QQQ) have gained 16.1% and 20.5%, respectively, in comparison.

Worsening the recession situation

In the next downturn, the federal deficits will also likely expand, which will be financed through the issue of bonds (BND) (AGG). Based on the natural market forces, as the supply of bonds increases without any corresponding increase in demand, the interest rates should rise. This scenario, in Gundlach’s opinion, will make the recession even worse.

In addition to this, a large chunk of corporate-grade bonds, which are rated investment-grade right now, will be rated junk (JNK) in a downturn. Gundlach previously stated that while there still isn’t an imminent sign of a recession, we could see one in 2020.

US companies Apple (AAPL) and NVIDIA (NVDA) have warned that China’s slowdown is hurting their earnings. Microsoft (MSFT), Amazon (AMZN), Netflix (NFLX), Alphabet (GOOG), and Facebook (FB) have also been affected by the trade issues between the world’s two largest economies.

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