- Bridgewater Associates founder Ray Dalio said Wednesday that the stock could fall further.
- Dalio commented on MarketWatch’s “Best New Ideas for the Money Festival.”
- He shares two tips for navigating the current environment.
Ray Dalio said the pain in the stock market this year may not be over.
As the Federal Reserve continues to hike interest rates — they did so by 75 basis points at their third meeting on Wednesday — investors can continue to expect increased competition for stocks in the form of higher yields, and damage to corporate earnings, Bridgewater Associates founder said Wednesday morning.
“I do believe that when you raise interest rates to the right level, competitiveness lowers interest rates, and it also hurts earnings, it hurts the economy,” Dalio said on MarketWatch’s “Best New Ideas for Currency Festival” in Manhattan Midtown.
Dalio said he thinks the Fed will raise the federal funds rate to between 4-5% and that the U.S. economy will deteriorate and enter a stagflationary environment in 2023. S&P 500 Will pay the price by dropping another 20% or so, reiterated the phone calls he made in the last few days.
Year-to-date, the S&P 500 is down 19%. The federal funds rate ceiling is currently at 2.5% and could rise to 3.25% after Wednesday’s FOMC meeting.
Given his gloomy outlook, Dalio was asked how investors should respond to the current environment and gave two answers.
the first is Invest in inflation-indexed bonds rather than nominal bonds. The former protects investors from rising or falling inflation, while nominal bonds can lose money when inflation is accounted for. For example, the 2-year U.S. Treasury note yields 4% — a healthy yield, but still below the 8.3% year-over-year increase in consumer prices in August.
“Start looking at your return on assets, including cash, in real dollars so you can factor in purchasing power,” Dalio said. “Then think about the type of asset — for example, inflation-indexed bonds might be better than nominal bonds.”
Vanguard Short-Term Inflation Protected Securities ETF (VTIP) provides exposure to inflation-indexed bonds.
Dalio also advised investors keep their portfolio balanced and diversified and avoid market timing.
“The most important thing you can do is have a balanced portfolio, not market time, but diversification,” Dalio said. “I wouldn’t encourage market timing. Get through these things.”
In the long run, Dalio said he Still optimistic about Chinaand indicates that asset prices are at low levels.
SPDR S&P China ETF (GXC) provides broad exposure to Chinese equities.
Dalio, whose hedge fund is the world’s largest with $150 billion under management, isn’t the only investment giant to say that U.S. stocks still have room to fall sharply.
Guggenheim Investments CIO Scott Minerd has said in a tweet in recent weeks that with such high valuations amid high inflation, stocks should fall another 20%.
GMO founder Jeremy Grantham, who once called the dot-com bubble a bubble, also said in an Aug. 31 comment that “every historical parallel shows that the worst is yet to come” and Indicates that in the past 100 years, there have been 3 other times the stock market has fallen by 50% or more as it is today.
Some Wall Street strategists, including Bank of America, Goldman Sachs and Morgan Stanley, said they see a further decline of about 20% for the S&P 500 if a recession unfolds.