Legendary investor Ray Dalio says the stock market has further to fall before a recession hits

For a lot of this yr, the Fed has held steadfast to its aim of a “gentle touchdown” for inflation, the concept of vanquishing inflation and not using a dramatic financial downturn. 

However regardless of a number of rate of interest hikes, inflation remains to be working sizzling, and enterprise leaders are saying that it’s not a matter of if a recession will occur, however when.

On Wednesday, after one other price hike, and a promise from Fed chairman Jerome Powell to remain the course till inflation comes down, Bridgewater founder Ray Dalio stated that the Federal Reserve will most likely hold tightening its financial coverage till excessive costs come down, irrespective of the implications. Consequently, a recession is probably going throughout the subsequent yr. 

“You’re beginning to see all of the basic early indicators,” he stated throughout an interview with MarketWatch editor-in-chief Mark DeCambre in the course of the outlet’s inaugural Finest New Concepts in Cash competition. These indicators, he stated, are contraction within the housing and auto sectors, that are the primary to be impacted by the Fed’s increased rates of interest. 

It’s not the primary time Dalio has sounded the alarm on imminent financial hassle. In June, he was already arguing on LinkedIn {that a} gentle touchdown was out of the Fed’s attain, at the same time as Bridgewater beat the bear market within the first half of this yr, delivering a 32% return to traders as different corporations struggled. 

Dalio’s feedback adopted the Fed’s determination this week to institute its third consecutive 75-basis-point price hike this yr. Previous to June, the final time the financial institution had made such an enormous price hike was in 1994.

These hikes have already slowed down financial progress considerably within the U.S., in keeping with Dalio. 

“We’re proper now very near a 0% progress yr,” he stated. “I feel it’s going to worsen into 2023 after which 2024, which has implications for elections.”

After the Fed’s price hike on Wednesday, the S&P 500 fell 1.7% to a two-month low. Dalio joined different billionaire traders like Carl Icahn and stated that the inventory market will sink additional this yr because the Fed continues its hikes, including that the bond market can be hit notably onerous.

“Who’s going to purchase these bonds?” Dalio requested, noting that there’s been a multi-decade “bull market” in bonds marked by elevated costs. “Now you could have unfavourable actual returns within the bonds…and you bought them taking place.”

Final month, Federal Reserve Chair Jerome Powell stated that the central financial institution will cease at nothing till inflation is below management, even when it means “some ache to households and companies.” 

This week, he was much more clear about the associated fee: “Now we have received to get inflation behind us. I want there have been a painless approach to try this. There isn’t.” 

That ache, stated Dalio, can be very sorely felt over the subsequent few years. “The Fed at all times has a tradeoff,” he stated, between financial energy and inflation. With inflation now the financial institution’s goal, it’s going to chart a course till “financial ache” is deemed extra extreme than inflation.

At that time, the financial institution will start to pare again on its price hikes. “Now we play the sport of, what stage will that be?” stated Dalio.

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