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DoubleLine's Gundlach says U.S. equities are in long-term bear market

FILE PHOTO: Jeffrey Gundlach, CEO of DoubleLine Capital, speaks during the Sohn Investment Conference in New York City, U.S., May 8, 2017. REUTERS/Brendan McDermid/File Photo (Reuters)

NEW YORK (Reuters) - Jeffrey Gundlach, chief executive of DoubleLine Capital, on Monday said the S&P 500 stock index is headed to new lows and that U.S. equities are in a long-term bear market.

Gundlach, speaking on CNBC TV, said passive investing has reached "mania status" and will exacerbate market problems.

"I think it is a bear market. I think we've had the first leg down and the second leg down is usually more painful than the first leg down," said Gundlach, who oversees more than $123 billion.

"I think this lasts a long time. It has a lot to do with the fact that, I believe, that we're in a situation that is ... highly unusual - that we're increasing the budget deficit so spectacularly so late in the cycle while the Fed is hiking interest rates."

The S&P 500 briefly erased its losses in late-morning trade on Monday but resumed its steep decline and pierced through Gundlach's target after he made his "bear market" comments.

The intraday low for the year in the S&P was on Feb. 9, when it bottomed at 2532.69. The low close for the year was on April 2 at 2581.88. On Monday, the S&P closed 2545.94.

Investors are also bracing for the Federal Reserve's last rate decision of the year on Wednesday, when they are expected to raise U.S. interest rates for a fourth time for 2018.

Gundlach said the Fed should not raise rates this week but will. "The bond market is basically saying, 'You know, Fed, there's no way you should be raising interest rates'," he said.

The U.S. central bank's quantitative tightening campaign has made markets nervous because of the ultra-low levels that have remained in place for several years, Gundlach said.

"The problem is that the Fed shouldn't have kept them (rates) so low for so long. The problem is, we shouldn't have had negative interest rates like we still have in Europe. We shouldn't have had done quantitative easing, which is a circular financing scheme," he said.

Gundlach also said the China-U.S. trade war gets worse from here. "China doesn't like to be told what to do by President Trump," he said. For its part, "I think they (the United States) will probably ratchet up the tariffs."

The remarks by Gundlach, who in April recommended investors short Facebook Inc, extended losses in Facebook shares on Monday after he characterized the social media giant as a "diabolical data-collection monster that would ultimately fall victim to regulation." The stock closed 2.69 percent lower.

Gundlach took a shot at passive investment strategies such as index funds, declaring the investing strategy a "mania" that is causing widespread problems in global stock markets.

"I'm not at all a fan of passive investing. In fact, I think passive investing ... has reached mania status as we went into the peak of the global stock market," Gundlach said. "I think, in fact, that passive investing and robo advisers ... are going to exacerbate problems in the market because it's hurting behavior," he said.

(Reporting by Trevor Hunnicutt and Jennifer Ablan; Editing by Nick Zieminski and James Dalgleish)