Late last year, the S&P 500 (^GSPC) tumbled 20% from its Oct. 3 intraday high to its Dec. 24 intraday. And despite the market’s sharp 17% rally from those lows, Bond king Jeffrey Gundlach says we’re in a bear market and that we could see new lows.
"A bear market has nothing to do with this 20% arbitrary thing," Gundlach, the CEO of $121 billion DoubleLine Capital, told Yahoo Finance in an exclusive interview. "It has to do with something crazy happening first, and then the crazy thing gives it up. And yet more traditional things continue to march on. But one by one they give it up."
That crazy thing: bitcoin.
“Bitcoin going from zero to 20,000 in a straight line,” Gundlach said. “It was crazy.”
“You knew it was crazy, because other things started to happen that we're truly insane,” he added. “There was a thing called Crypto Kitties. It wasn't a crypto currency. It was a collectible, but it had the word ‘crypto’ in it. They were each unique, but there were cartoon drawings of cats. There was actually a moment where one sold for over $100,000. Of course, they're worth zero today.”
“That is a sign.”
Soon after, the global stock market peaked and turned, Gundlach noted. That was followed by stock market sectors peaking and turning like dominos.
The last of those dominos included Amazon (AMZN) and Apple (AAPL).
“Then, on October 3rd, it was over,” he said pointing to the S&P’s peak.
December’s dip buyers will sell at lower levels
The market has since been saved by the Fed's pivot to be “patient” on monetary policy and the subsequent rally in the bond market, all of which has kept interest rates low. For now.
"If the long end of rates starts to rise, as I expect, and if we break through 3.50% on the 30-year, I think it's over,” Gundlach added. “Because the competition from the bond market, particularly against a climate of limiting one of the engines of stock price appreciation, which is buybacks, is thought to be potentially in jeopardy."
Gundlach believes that investors who bought during December's dip will likely end up selling at a lower point.
"They bought in, they thought it was a buy-the-dip. They feel emboldened buy it. They've gotten an economic and psychic reward so far. Once that buy goes underwater, it will accelerate the selling, because those people will turn into sellers. I think that'll happen in the corporate bond market too."
Gundlach has warned of the risks in the corporate bond market, but eventually, there will be an opportunity to put capital to work.
"[When] the next recession comes, there's going to be an outrageous opportunity in corporate credit," he said. "I think you want to own none right now. None. Instead, you just say, 'I might lose a few percent, versus playing in that game.' When it goes down, what we saw what happened from October 3rd until Christmas Eve, I mean, there was a pretty big drop.”
“I think that that's just a taste of things to come," he said.
[Full transcript of Jeffrey Gundlach’s extended conversation with Yahoo Finance]
Sam Ro contributed to this article.
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Julia La Roche is a finance reporter at Yahoo Finance. Follow her on Twitter.