- Jeff Gundlach said it's time to be more bearish on stocks and he sees the S&P 500 dropping 20%.
- The billionaire "Bond King" told CNBC he now views deflation as the key risk to the US economy.
Billionaire investor Jeff Gundlach believes it's time for investors to become more bearish on US stocks given the risk of deflation next year is increasing.
The DoubleLine Capital CEO — whose nickname is the "Bond King" — also advised investors to buy long-term Treasurys on Tuesday as he suggested the Federal Reserve would do well to reverse course on its aggressive interest-rate hikes.
Gundlach partially agreed the S&P 500 could fall 20% by mid-October, speaking to CNBC's Scott Wapner at the Future Proof festival. He pointed to a weakening US economy and the Fed's interest-rate increases, which drive up the cost of borrowing and servicing loans for companies.
"The action of the credit market is consistent with economic weakness and stock market trouble," he said. "I think you have to start becoming more bearish."
The billionaire investor noted he has been relatively neutral on the S&P 500 for the last six months, but is now ultimately looking for a target of about 3,000 on the benchmark US stock index — a 20% or so decline. It closed lower at 3,932.63 on Tuesday as equities tanked following the hotter-than-expected August inflation report.
"You always want to own stocks, but I'm a little on the lighter side," Gundlach said, noting he's not much of a stock picker. But he pointed to emerging markets as the biggest upcoming opportunity in stocks for investors.
Investors are closely watching US economic indicators for a potential trigger for the Fed to pivot away its rate hike campaign. They're concerned the policy could tip the economy into a recession, which would depress stocks, if the central bank doesn't get the balance right.
Gundlach now sees deflation — a fall in the overall level of prices — as the key threat to the economy and markets. Given that, investors should dive into long-term US debt securities, he suggests.
"Buy long-term Treasurys, because the deflation risk — in spite of the fact that the narrative today is exactly the opposite — the deflation risk is much higher today that it's been for the past two years," he said.
"I'm not talking about next month. I'm talking about sometime later next year, certainly in 2023," he added.
If inflation gives way to deflation in the US economy, the Fed is likely to respond by loosening its monetary policy. That would in turn push bond yields lower and Treasury prices higher.
The market is now pricing in a 75 basis point rate hike by the Fed at its September meeting, though some investors are anticipating a 100 basis point rise to bring inflation down to its 2% target.
But Gundlach said the central bank is "oversteering" with its rate hikes. Asked what the central bank should do in its next policy call, he suggested there is a lag before the effect of its previous actions is felt in the economy.
"Thanks to the thing today, I might do 25," he said, referring to the inflation report and a 25 basis point rise. "If you'd asked me yesterday, I'd have said do nothing."