The stock market has shades of the dot-com and housing bubbles as investors move into 'junkier things,' warns Jeffrey Gundlach

• Jeffrey Gundlach drew parallels between the stock market and the dot-com and housing bubbles.
• Investors are buying ever-riskier assets as valuations have become broadly overstretched, he said.
• The billionaire fund manager predicted a recession this summer, and recommended holding some cash.

Jeffrey Gundlach said there are shades of the dot-com and housing bubbles in markets, and predicted the euphoria would end with asset values tumbling and a recession this summer.

The stock market's rally has extended beyond the "Magnificent Seven" in recent months, spurring investors to bet on worse and worse assets, Gundlach told Pensions & Investments in a recent X Spaces interview.

"This feels like the type of environment that we experienced entering the year 2000, where you have a tremendous narrow market that's broadened out because of grabbing, because of momentum," the billionaire investor and DoubleLine Capital CEO said.

"This happened in 2008, 2009 as well, the blue-chip stuff gets very overvalued," he continued. "So people start to relax their value standards, if you will, and they start moving down into junkier things."

Gundlach's comparisons are striking as the S&P 500 roughly halved between 2000 and 2002, and between 2007 and 2009, after the dot-com and housing bubbles burst.

He noted the benchmark US stock index — which surged 24% last year and is up about 2% this year — is clearly overvalued, but "that doesn't mean it's going to go down tomorrow."

The fund manager questioned why stocks and other securities are "on fire" and "rallying like crazy" when consumer-debt delinquencies have risen, and the state of the commercial real estate market has actually worsened since two or three months ago when it was "priced for the world coming to an end."

Gundlach decried a "lazy or a complacent type of market" where "people start to do things that they wouldn't have contemplated two or three months ago, when the prices were much lower, the yields were much higher, and the fundamentals were slightly better."

The veteran investor said the buying frenzy has been fueled by sentiment instead of fundamentals like cash flows or net asset values, noting that stocks jumped last year even though company earnings hardly grew.

He cautioned against that kind of optimism, which was been fueled by hopes of inflation fading, the Federal Reserve slashing interest rates, and the economy skirting a recession.

Gundlach said he wasn't prepared to dismiss two big warning signs, the inverted yield curve and a prolonged decline in leading economic indicators. "I think we'll be in recession by the middle of this year," he said.

The DoubleLine chief also bemoaned the national debt ballooning to record highs, blaming carefree government spending and years of near-zero interest rates that fueled excessive borrowing and spending.

Keep cash

"It's like giving a kid too much candy, they just can't stop," he said. "They don't worry about how they're going to feel terrible in three hours."

"We're a hedge fund that's dreading a margin call," he added, noting America's liabilities now outweighed its assets by some measures.

Gundlach advised investors to keep 20% to 25% of their portfolios in cash, so they're ready to pounce as valuations are so overstretched that "stuff's going to get cheaper."

The bond specialist has been sounding the alarm for a while. In January, he called the S&P 500 a "pretty lousy trade" and pegged the chance of a recession this year at 75%, after making similar comments in September.