Gundlach: '2% Upside, 20% Downside' in U.S. Stocks

May 12 2016 | 8:47pm ET

By Jennifer Ablan (Reuters) - Jeffrey Gundlach, the chief executive of DoubleLine Capital, said on Thursday that the Federal Reserve will be challenged to raise interest rates this year.

Fed officials seem to be in disagreement about the timing and number of rate hikes in 2016, Gundlach, who oversees $95 billion at Los Angeles-based DoubleLine, said on an investor webcast.

There's "some (hawkish) rebellion showing up at the Fed," Gundlach said. Kansas City Fed President Esther George said on Thursday that the Fed is keeping interest rates too low and risks encouraging companies to take on excessive amounts of debt.

Also on Thursday, Boston Fed President Eric Rosengren said the economy appears to be strengthening after the sluggish first quarter, giving the green light for the central bank to continue its attempt to normalize interest-rate policy.

Against the backdrop of hawkish language, Fed Chair Yellen is "the biggest dove" at the Federal Reserve, said Gundlach, adding there is a 50 percent chance of only one rate hike this year.

In a separate interview with Reuters, Gundlach noted that the Standard & Poor's 500 stock index has been around 2,050 for some time. "It's tough to get much of a rally off of price-to-earnings this high with earnings falling and the Fed itching to tighten with GDP growth already projected to decline," he said.

"I'm sticking with my '2 percent upside and 20 downside' prediction on U.S. stocks.... it's working, I can see it going to 1,600," Gundlach added, referring to the S&P Index.

Gundlach, on the webcast, said negative interest rates implemented by some major central banks, notably in Japan, are backfiring. Currencies strengthen and stock markets weaken on such moves, he said.

Yellen said on Thursday that while she "would not completely rule out the use of negative interest rates in some future very adverse scenario," the tool would need a lot more study before it could be used in the United States.

If the Fed were to implement negative rates, Gundlach said, "I am not sure what I am going to do... But I don't think it will happen."

Regarding the presidential election campaign, Gundlach said presumed Republican candidate Donald Trump will win. He said Trump has been underestimated for months, but he is the "better campaigner."

"People are going to start putting greater focus on Hillary (Clinton). Voters are going to say, 'No. I don't want this,'" he told Reuters. "Hillary is going to evolve into an unacceptable choice. If she is such a great candidate, how come (Bernie Sanders) is beating her?"

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