DoubleLine Funds founder Jeff Gundlach said the stock market could sell-off around inauguration day.
During his final investor webcast for the year on Tuesday, he pointed out that stocks typically rise in the days after an election, just as they have.
But they drop after the president is sworn in, as investors realise that he does not have a magic wand to implement everything they are hopeful for.
Gundlach’s presentation was titled “Drain The Swamp,” a reference to President-elect Donald Trump’s promise to reform ethics in Washington by not relying on career lobbyists and party insiders. However, Trump’s top cabinet picks have included former Goldman Sachs staffers, CEOs, and politicians.
Gundlach was one of the only strategists to correctly forecast that Trump would win. In a webcast last month, he said Americans’ discontent with wage growth, income inequality and Obamacare were among the reasons why Trump unexpectedly won.
It's what many people in rural America were looking for when voting for Trump, Gundlach said.
Inflation, as measured by the Consumer Price Index (CPI), is vastly different now compared to when Reagan took office. The Fed Funds rate was much higher then, as well.
ISM manufacturing was similar, and the unemployment rate adjusted for participation was also similar.
'Clearly, under a Trump administration, this blue area is going to be moving up,' Gundlach said.
All you have to do is drive through Midtown Manhattan or pick someone up from Los Angeles International Airport to see the need for more spending, Gundlach said.
He doesn't believe that the new Republican Congress and Senate will counter Trump's attempts to spend heavily on infrastructure.
Stocks tend to hold their gains into the new year, but it isn't so pretty after inauguration day as the reality sets in that the new president doesn't have a magic wand.
Given how closely we've followed this pattern, there's every reason to give it some merit and expect a sell-off around inauguration day, Gundlach said.
France sticks out as a big country with a huge unfavorability rating towards the European Union. The upcoming election could be a real milestone if it goes the way of Brexit and Trump, Gundlach said.
If the US 10-year yield rises above 3%, it would no longer possible to argue that the 30-year bull market is still on, Gundlach said.
The benchmark rate above that level would hurt stocks and the housing market, he added.
The real narrative is whether the Fed will sound more hawkish.
A rise in the costs of shelter, food and energy will push CPI above 3%, Gundlach forecast.
It's expectations are now more in line with the market's. And when someone capitulates, it's usually at the wrong time, Gundlach said.