Challenging home country bias in portfolios may be particularly important in 2025. Diversifying away from U.S.-only investments has been a key theme for DoubleLine for the past few years; however, the moment is at hand for international diversification, CEO and CIO Jeffrey Gundlach said during the DoubleLine Total Return Webcast on March 11.
As the odds of recession have been increasing recently, there has been further indication that the U.S. will underperform during a negative market.
“It looks like the odds of recession are going up. We saw economists had lowered them to about a 20% chance of a recession this year, and now I hear some people raising their estimates to 30%–40%,” Gundlach said. “I would say we're more at a 60% chance of a recession in 2025.”
Importantly, Gundlach thinks the dollar will go down and the U.S. market will underperform in the next recession. While this may go against what has historically happened during recessions, the context has changed and the current environment is different.
“We do not have a secularly declining interest rate environment. We have a secularly increasing interest rate environment, particularly at the long end,” Gundlach explained. “I believe…during the next recession, the dollar will go down and the U.S. will underperform. 10-year treasury yields, or certainly 30-year treasury yields, might go up.”
Gundlach on the Status of the 10-Year Treasury Yield
Data suggests the 10-year treasury yield could have room to fall further. However, that would require more economic angst and real recession risk, according to Gundlach.
The 2-10 yield curve was inverted for a while, but has now de-inverted. There has been a meaningful steepening of the yield curve since it reached an inversion of 108 basis points.
Typically, when the curve de-inverts, a recession would be expected. While that hasn’t happened yet, the 12-month moving average has not yet gone above zero, although it’s getting really close, according to Gundlach
Considering recessionary risk, the real definitive moment is when the 12-month moving average crosses above the zero line, which should be happening fairly soon, Gundlach said. “So it looks like the odds of recession are going up.”
Unemployment Remains a Key Indicator
The 2s10s spread suggests that the unemployment rate should be going up, Gundlach said. “It started to do that and then slowed down, so that's signaling further deterioration in the employment picture,” he added.
However, if DOGE does cut jobs and waste from the government, there could be a very significant effect on the unemployment rate, according to Gundlach.
The unemployment rate versus its 36-month moving average is still signaling recession. It looked like it was going higher, but that stalled out, Gundlach said. Past moments in time most reflective of the current picture were other peaks of risk assets in 2000 and 2007–2008. However, present day is flattened out a bit more than those other periods.
Rate Cut Expectations
Fed rate cut expectations have been top of mind for many investors. Before the Fed started cutting rates in September, the Fed funds target was very different from the hike cut expectations, Gundlach said. It was also very different from the two-year treasury.
By cutting rates 100 basis points, the Fed has gotten more in line with the hike cut expectations. The two-year treasury now is about 3.9%, suggesting the Fed will cut rates once, maybe one and a half times this year, Gundlach said.
In recent days, the market has projected that the Fed might cut rates more than two times this year. However, Gundlach is skeptical of this happening.
“More recently, in the last month, we're seeing cuts being priced back in,” Gundlach summarized. “So it's been a roller coaster ride of about one cut, down to about eight cuts, and then back to one cut—and now it's coming back to more cuts. So this continues to gyrate.”
Why Gundlach Likes European Equities
Gundlach reiterated his recommendation that one invest in European stocks as well as other non-U.S. stocks.
With everything going on with tariffs and Europe getting the rug pulled out from them on the U.S. being willing to foot the bill for NATO forever, Gundlach said, Europe could be in the process of reindustrializing.
“That could lead to continued, ongoing, perhaps multi-year outperformance — maybe even decade out performance — of non-U.S. stocks versus U.S. stocks,” Gundlach said.
One of the reasons why European stocks have been able to start outperforming recently is the dollar has weakened. It moved down several percentage points in just the last few months, according to Gundlach.
Looking at emerging markets, the only time emerging market equities have outperformed U.S. stocks is 2022, during the bear market. This could be further indication that the U.S. will underperform, not outperform, during a negative market, Gundlach said.
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