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- Jeffrey Gundlach, the CEO and chief investment officer of DoubleLine Capital, starts his macroeconomic and portfolio allocation analysis with a simple question: "Do we see a recession coming?"
- He uses a confluence of leading economic indicators, consumer confidence metrics, and initial jobless claims to help him identify the front edge of a recession.
- Gundlach says a key gap in consumer confidence metrics "is exactly as big as it typically is before big recessions."
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After a tumultuous 2019, it seems that the market's recessionary fears have finally quelled.
The yield curve has uninverted for the most part, US ISM Manufacturing PMI is back above 50, trade agreements have been signed, and equities have rekindled their record-setting move higher.
But Jeffrey Gundlach, the CEO and chief investment officer of DoubleLine Capital, is still keeping his eyes peeled for trouble on the horizon.
"People say: 'Gundlach, you always find like seven risks for every one that exists," he said at a DoubleLine Event at the Peninsula in Chicago. "And I say: 'That's my job - is to look for risk."
He continued: "A lot of people, what they do is look for non-risk. They see risk, and they come up with some sort of a rationale for why it really isn't going to be a problem."
Gundlach says that his macroeconomic and portfolio allocation analysis begins with a simple question: "Do we see a recession coming?"
To assist in that cause, he stays glued to readings of the Conference Board Leading Economic Index, consumer confidence, and initial jobless claims.
(1) Conference Board Leading Economic Index
Gundlach pays close attention to the Conference Board Leading Economic Index (LEI) on a year-over-year basis.
"That really bears watching because every single recession has had a necessary condition of leading indicators being negative first," he said. "We're very close to zero."
The LEI's latest reading came in at 0.1 year-over-year, dangerously close to meeting that negative criteria. For context, Gundlach says that 18-months ago the LEI was at 6.5.
"The other thing that we look at that is almost game over for a recession is consumer confidence which ties into initial unemployment claims," he said.
(2) Consumer confidence
Gundlach notes that the key to understanding this indicator comes down to two of the survey's questions.
The first is: How do you feel about today?
"Consumers feel great about today," he said. "Those surveys are at the same levels as 1999 and 2007, which might be good, might be bad."
Gundlach says that although confidence is high today, it shouldn't be solely depended on without vetting the second question.
That second is: How do you think you'll feel 12 months from now?
"About 18 months ago, the answer to that question was: 'I feel horrible about what's coming in 12 to 18 months - just about as bad as you can,'" he said. "The gap between today and 12 months from now is very large and is exactly as big as it typically is before big recessions."
Gundlach notes that this gap can stay blown out and precede the front end of a recession for 2 to 2 1/2 years.
"What you'll watch for is when the viewpoint of today deteriorates down and starts to look like the future - so that the big gap goes to zero - that almost definitionally says you're headed, if not already in a recession."
That brings us to the next facet of Gundlach's go-to recessionary indicators.
(3) Initial jobless claims
"Now what would cause people to feel lousy about today?" he asked. "Their neighbor losing their job."
This metric provides Gundlach with an easy way to track how consumers are likely to feel at the present moment - and he's got it down to a science.
Gundlach says that's "it's almost a slam dunk" in terms of the indicator's ability to precede a recession. When the four-week moving average of initial claims tops the five-year moving average, he says it's "game over."
"It's weird how well it works - and this goes back decades," he said. "It's right when you get that crossover that it's the front edge of the recession."
With all of that under consideration, Gundlach relays that the longer-term moving average is hovering near 240,000, while the weekly numbers are coming in around 210,000 to 215,000. Not a cause for concern at this moment in time.
"Those are things that really bear watching," he concluded. "That's a really good, fast, high-frequency indicator. It's weekly data so it gives you a good heads-up."