Billionaire Jeffrey Gundlach’s Recession Portfolio

Many stock investors are basking in the market's robust rally, with some forecasting more big gains ahead. But billionaire Jeffrey Gundlach, the CEO of DoubleLine Capital, isn't impressed. He hears the alarm bells of an impending recession that he forecasts will arrive sometime in 2019. To prepare well in advance, Gundlach, CEO of DoubleLine Capital, has adjusted his portfolio with some of his favorite picks: Invesco Senior Loan, SPDR S&P Oil & Gas Exploration & Production, iShares MSCI Brazil, Tortoise MLP and Wisdom Tree Japan Hedged Equity. A major warning sign is the flattening yield curve, and with the 10-year Treasury just 28 basis points above the 2-year Treasury, the yield curve “is flashing yellow,” Gundlach told Barron’s, “It needs to be respected.”

Gundlach's Recession Portfolio

As the Federal Reserve pushes up the short end of the yield curve as part of its current monetary stance in favor of greater tightening, Gundlach also warns of increasing U.S. government debt in an environment of rising interest rates. He calls the climbing debt levels amid rising rates a “death wish,” causing debt-service payments to face continued upside pressure.

Be Conservative

With his view that a recession is just around the corner, Gundlach recommends being conservative. Investors should think about investing in low-risk and relatively low-duration bonds, like the Invesco Senior Loan fund. He also likes commodities, which currently present a good buying opportunity after recently being “spooked” by tariff threats. Recommended commodity investments include the SPDR S&P Oil & Gas Exploration & Production and the iShares MSCI Brazil, considering Brazil’s role as a major supplier of global commodities.

The Tortoise MLP fund, which invests mainly in natural gas infrastructure equities, is also a recommended commodity play. While the fund has fallen, it has not cut its dividend in five years, with a current yield of 10.7%, according to Barron’s.

Gundlach also likes the WisdomTree Japan Hedged Equity Fund, which invests in the Japanese equity market while hedging its exposure to fluctuations between the U.S. dollar and the yen. Japanese equities should receive support from the Bank of Japan’s monetary ease aimed at maintaining liquidity conditions, unlike “the Fed and, increasingly, the ECB,” he notes.

Warning Signs Piling Up

Gundlach is not the only waving the warning sign, as there have been other prominent investors calling for major drops in equity markets: in April, emerging markets fund manager Mark Mobius called for a 30% drop in markets (for more, see: Contrarian Mark Mobius Sees a 30% Stock Plunge); in May, hedge fund manager Dan Niles warned of a 50% plunge in the S&P 500 (for more, see: Why the Stock Market May Fall 50%: Niles); and in June, former Office of Management and Budget director under President Ronald Reagan, David Stockman, also predicted a 40% drop in the S&P 500 (for more, see: ‘Daredevil’ Stock Market Poised to Drop 40%: Stockman).