The stock market is a hollow tree that could be about to snap, warns bond king Gundlach
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Jeffrey Gundlach has fresh worries about the U.S. stock market — and likens that trouble to the snapping of a distressed tree. – Getty Images
October and the final quarter of the year are kicking off with more stress in the bond market, as yields for 10- and 30-year Treasurys revisit 2002 highs. Stocks, as a result, are setting up for a mixed open.
What has been notable to some investors since the pressure on bonds increased last month is that stocks haven’t suffered the deep declines seen in past similar episodes.
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Our call of the day comes from the investor known as the bond king, Jeffrey Gundlach, who likens stock markets to a hollow tree that’s about to break. In an interview with David Rosenberg of Rosenberg Research, Gundlach relayed the story of a 100-year-old silver maple at his house in Buffalo, N.Y., that lost a giant limb, nearly hitting the chimney.
What he soon realized was that a tree thought to be in decent shape a year ago, was actually completely hollow and “on the edge of complete failure.”
“It occurred to me that [is] where we are in the markets today,” said the DoubleLine Capital CEO founder and chief investment officer. He noted that as the S&P 500 is near record highs, fewer companies are participating, creating what is known as poor breadth.
According to MarketWatch calculations, 80% of S&P 500 companies are at least 10% below their 52-week high — in other words, they’re in a correction — and 39% are at least 20% below.
“So there’s all this rot that’s in the S&P 500, but it’s not in plain sight, [and] you’ve got to wait for the branch to fall off to figure out that the market’s hollow, just like the tree was hollow,” said Gundlach, who is also worried that investors may be facing contagion from a separate set of assets.
“I feel like there’s a direct parallel to all of this in the private markets,” said the investor best known for calling the U.S. housing bust in 2007.
He explained a growing circular investment, in which private-equity firms buy a private-credit unit and then buy an insurer, which in turn buys the loans from the affiliated private-credit company.
Gundlach said those private-equity and private-credit firms keep assuring investors there are no problems, and their quarterly figures often won’t reveal any issues. However, he pointed to one private-credit fund that held assets marked at $100 late last year, then lowered them to between $77 and $78 by the first quarter, meaning the underlying portfolio had dropped in value by nearly 23%. And those funds hold thousands of diversified loans, therefore revealing major, but hidden, losses, he said.
“I think that all these things are creating an awareness that’s building that everything isn’t just fine,” Gundlach said.
Investors are also increasingly facing stress around the soaring U.S. deficit, said Gundlach. The U.S. government has two not-great choices: printing money or restructuring that debt, under which holders of Treasurys would have to accept longer maturities on bonds or lower interest payments, or coupons. Both are inflationary, he said.
That’s as bond yields rise with the war in Iran pushing up energy prices and a “monumental amount of bond issuance” globally hitting the market, compounded by artificial-intelligence companies looking to pay for their technology build-outs.
Rising debt issuance is only stacking up interest costs for the government, which may have to pay for it through printing money or trying to manipulate longer-term yields, which will ultimately hit the dollar DXY.
He noted that over a dozen prior S&P 500 pullbacks since 2000, the ICE Dollar Index has gained 8% to 10% each time, but after the April correction of 2025 the dollar went down for the first time. “That’s because people realize that we’re in a different regime and so the dollar will not go up in the next recession,” he said. “[I]t will go down.”
U.S. stocks DJIA SPX COMP opened firmer, with 10-year BX:TMUBMUSD10Y and 30-year Treasury yields BX:TMUBMUSD10Y earlier hitting the highest levels since 2002. The dollar DXY is climbing.
Key asset performance
Last
5d
1m
YTD
1y
S&P 500
7651.54
-0.71%
-0.20%
11.77%
14.01%
Nasdaq Composite
26,861.06
-0.28%
2.45%
15.57%
18.04%
10-year Treasury
5.304
9.90
53.10
113.20
121.80
Gold
4189.5
-3.08%
-5.52%
-3.29%
7.63%
Oil
91.93
-2.99%
0.28%
60.13%
51.50%
Data: MarketWatch. Treasury yields change expressed in basis points
Weekly jobless claims showed a surprise dip, totalling 197,000, which come ahead of payrolls data on Friday. Also on tap: the Institute for Supply Management’s manufacturing index, and a number of Federal Reserve officials speaking, notably Fed governor Christopher Waller and Vice Chair Philip Jefferson.
Nike NKE will report quarterly results after the close.
A tough third quarter for most assets just wrapped, though the S&P 500 managed a 2.3% gain in total-return terms, according to the chart from Deutsche Bank strategists. Other winners were oil as well as Greek, Hong Kong and Brazil stocks during a quarter in which the global economy was grappling with fresh inflation pressures due to the Iran war and “the resumption of a globally synchronized rate hiking cycle,” said strategists Henry Allen and Jim Reid.
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