Avoid expensive stocks, set aside some cash, and brace for a recession, elite investor Jeffrey Gundlach says

• Jeffrey Gundlach is wary of stocks at current valuations, and expects a recession to hit.
• The elite investor said the inverted yield curve and leading economic data signal problems ahead.

Billionaire investor Jeffrey Gundlach prefers holding cash to overpaying for stocks today, and views a recession as inevitable, he told Fox Business Network this week.

"I'm suspicious of the valuations, I'm suspicious of the exuberance in the market, so I want to have cash at this point which I might want to deploy in the aftermath of the recession that is going to come," he said.

The benchmark S&P 500 index surged by 24% last year, and has climbed another 3% this year to an all-time high. Technology stocks have led the charge, including Nvidia which has more than quadrupled in price since the start of last year, boosting its market capitalization to a record $1.5 trillion.

"We're in a valuation spot in the equity market where I think you have to start looking long term and kind of skip this last phase of the exuberance game because I think the values are very, very high," Gundlach said. He advised investors to set aside some cash to buy stocks in India, Japan, and other foreign countries as the global economy slows and valuations drop.

The DoubleLine Capital CEO — whose nickname is the "Bond King" — flagged the yield curve inverting then de-inverting as a reliable recession indicator. He noted that 10-year Treasury yields dropped below 2-year yields more than 18 months ago, and the gap between them has shrunk dramatically in recent months.

"When you start to de-invert, you really get to be on recession watch," Gundlach said. "The fact that recession hasn't come after 80-plus weeks of yield curve inversion — it's very bad logic to say it's not coming, because the de-inversion is happening."

Gundlach pointed to the Leading Economic Index, a set of forward indicators, declining for 21 straight months as evidence of trouble ahead. He also noted that a majority of US states have reported rising unemployment over the last six months.

Against that backdrop, the fund manager encouraged the Federal Reserve to cut interest rates this year after hiking them from virtually zero to over 5%. He said that borrowing costs are too high on a real or inflation-adjusted basis now, and excessive rates will make it extremely painful for the government to pay the interest due on the national debt.

Gundlach warned earlier this month that the S&P 500 looked like a "lousy trade," and a disappointing earnings season could drag down the index. He also said a recession looked highly probable, and labor hoarding could eventually lead to a big wave of layoffs.