Billionaire Ray Dalio, founder of one of the world’s biggest hedge funds, has warned stocks could fall even lower this year after warmer-than-expected August inflation data rattled markets this week .
“It looks like interest rates will have to rise significantly (towards the upper end of the 4.5% to 6% range),” the Bridgewater Associates founder wrote in a LinkedIn post on Tuesday. “This will reduce credit growth to the private sector, which will lower private sector spending and, therefore, the economy.”
The S&P 500 has already plunged more than 6% this week on concerns about skyrocketing inflation, rising interest rates and a darkening economic outlook continue to weigh on the market. The Dow Jones Industrial Average, meanwhile, lost more than 1,800 points, while the tech-heavy Nasdaq Composite fell about 1.7%.
If interest rates rose to 4.5%, that would trigger a roughly 20% fall in stock prices based on the present value discounting effect, Dalio said. In addition, there would be another negative impact of 10% related to lower revenues.
INFLATION RISE FASTER THAN EXPECTED IN AUGUST, KEEPING PRICES VERY HIGH
The current benchmark federal funds range of 2.25% to 2.50% is around the “neutral” level, meaning it does not support or constrain economic activity. However, Federal Reserve Chairman Jerome Powell has suggested that a restrictive stance will almost certainly be needed as the central bank attempts to rein in the economy.
One of the reasons Dalio thinks interest rates will climb so high this year is because he thinks the market is seriously underestimating the destination of inflation. While the market expects inflation to hover around 2.6% over the next decade, Dalio estimated that the real rate will be closer to 4.5% to 5% barring major economic shocks. .
“The bottom line is that it seems likely to me that the inflation rate will stay significantly higher than people and the Fed want it to be (while the year-over-year inflation rate will come down) , that interest rates will rise, that other markets will fall, and that the economy will be weaker than expected, and this without taking into account the tendencies of worsening internal and external conflicts and their effects” , he wrote.
Dalio’s comments come just days after the Department of Labor announced that the consumer price index for August was warmer than expected. Prices rose 0.1% on a monthly basis and 8.3% year on year, dashing analysts’ hopes of a monthly decline.
Shares fell sharply on Tuesday after the surprisingly hot report on fears of an even more aggressive market fedwith the Dow Jones slipping 1,276 points – the worst day since June 2020.
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Investors are already preparing for the Fed’s policy-making meeting next week, which is expected to take place on September 20-21. Traders are betting officials will approve another 75 basis point rate hike – the third of its kind this year – by the end of the meeting, although some on Wall Street believe central bankers could go even further with a full point boost.
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