S&P 500 index 2% upside, 20% downside, says Gundlach

March 9
5:15 AM 2016

Indicating a dreadful risk-reward trade-off, Standard& Poor's 500 index has two percent upside and 20 percent downside, says money manager Jeffrey Gundlach. He considers betting on stocks as a big loss proposition. The recent rebound in the market is considered to be a 'bear market rally.'

The US stocks benchmark S&P 500 index suffered losses during the past two weeks as selloff in energy stocks increased pressure. Worsening economic data from Asia has further dampened the market confidence. The latest data showed the drop in China's exports and weakening in Japan's economy. Investors preferred to take risk before the meeting of central bankers in Europe and the US.

Jeffrey Gundlach says the market is in a bear rally. According to Gundlach, Standard & Poor's 500 index has about two percent upside and 20 percent downside potential. Bloomberg reports that with domestic stock markets moving weaker with losses, the chances of recession in the US are low, says Gundlach. Oil inventories are still high though, while demand is weak. This makes immediate recovery in energy markets bleak in near term.    

Gundlach sees high chances of bankruptcy in the energy sector. Several corporate firms are facing the danger of further downgrading and this will impact banks' lending as well. The default rate is set to soar as recovery rates are likely to be disappointing. Borrowers in the energy sector were leveraging heavily.

USA Today further adds that stocks went down from the first session of 2016 until 11 February. Then rebound taken place from following session, Standard & Poor's 500 index rallied 9.3 percent paring early losses to just 2.15 percent for the year so far. The eased down fears about the US economy infused fresh buying interest into stocks that triggered a strong rebound.

Meanwhile, renewed concerns about global growth are impacting the Wall Street. Asian data has further contributed to anxiety that's already in place on assumptions that monetary policy wouldn't be enough to support the global economy. S&P 500 index recorded its best three-week upward stretch since 2014. 

During the past two weeks, Standard & Poor's 500 index suffered the most. Energy stocks and disappointing Asian economic data put more pressure on S&P 500 index. Commodity and banking stocks, which supported the recent gains on the Wall Street, turned weaker. S&P 500 index fell 1.1 percent 1979.28 in New York indicating its first drop in March, as reported by Financial Review

Gold rose 19 percent this year so far to $1,262 per ounce. Gold price is forecast to reach $1,400 an ounce. Gundlach recommends 'stay long' on the yellow metal. Negative interest rates in Europe and Japan are affecting their currencies with Euro and Yen  rising against the US dollar since central bankers moved rates to below zero level. 

Gundlach manages $56-billion DoubleLine Total Return Bond Fund with Philip Barach. Los Angeles-based Double Line Capital's major mutual fund has surpassed 99 percent of Bloomberg peers during the past five years and 58 percent since 2016. 

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