While most everyone has been pointing to the coronavirus as the catalyst for the recent market downfall, DoubleLine Capital CEO and “Bond King” Jeffrey Gundlach thinks something else is on investors’ minds: the rise of Bernie Sanders in the Democratic primary race.
“The market goes down in a knee-jerk way on the Bernie rise, but the market going down makes Bernie’s polls go up on his rejection of a market-based economy. Which makes the market go down another leg.”
“If this stock market reversal is due exclusively to the virus, then why is United Healthcare down far more than (the S&P 500)?” Gundlach asked in a Wednesday email to CNBC. “Why is healthcare as a sector broadly not outperforming? Answer to these questions: The market is digesting a better than 50% chance of Bernie getting the nomination.”
U.S. stock indexes took a beating in the first two days of trading this week as investors worried about how the global economy would fare when faced with the coronavirus outbreak that has now spread to multiple countries outside of China, its country of origin. The S&P 500 lost $1.7 trillion during the Monday and Tuesday drubbing, which was 6.3% of the index.
Sanders, the Vermont Senator and self-proclaimed “Democratic Socialist,” has been surging in the primary poll. The latest RealClearPolitics average has Sanders at 29.2% of the vote, with former Vice President Joe Biden trailing in second at 18% and billionaire Michael Bloomberg at 14.4%, rounding out the top three. Gundlach thinks this could be an endless cycle of market reactions if Sanders keeps this momentum going.
“Maybe this is the dark side of momentum investing (which is exactly what defines ‘passive’),” Gundlach said in his note. “The market goes down in a knee-jerk way on the Bernie rise, but the market going down makes Bernie’s polls go up on his rejection of a market-based economy. Which makes the market go down another leg. Rinse and repeat.”
Gundlach has warned what a Sanders presidency could do to stocks in the past and he hasn’t been the only Wall Street big shot with those sentiments. Gold bug Peter Schiff recently predicted that gold would go to $2,000 overnight because a Sanders presidency means “much bigger government deficits, and much more money printing by the Fed because there is no way to finance all of the spending that will happen with tax hikes on the rich.”
Of course, there’s so much gridlock in Washington these days that the impact of a Sanders presidency is also regarded as overblown by some as long as Congress remains split. Democrats currently control the House of Representatives while Republicans hold the Senate.
The Bond King also said he feels bad for the Federal Reserve because he thinks there is another rate adjustment on the horizon soon after the central bank claimed the U.S. economy was “in a good place.”
“Just weeks after finally being able to term the present policy stance ‘appropriate’ and ‘in a good place’ the bond market is asserting that present policy is, in fact (to quote Biden), in need of significant adjustment,” Gundlach wrote.
The Fed cut interest rates three times last year to a range of 1.5% to 1.75%, but Gundlach thinks that will have to be adjusted downward again soon, especially if commodity prices like oil continue to show weakness.