The Federal Reserve's raising of interest rates could bring the economy "down," according to billionaire Ray Dalio.
In a recent LinkedIn post, the Bridgewater Associates founder said increasing interest rates to about 4.5% — meant to offset inflation — will cause stock prices to plummet by 20%.
“It looks like interest rates will have to rise a lot (toward the higher end of the 4.5% to 6% range),” Dalio wrote. “This will bring private sector credit growth down, which will bring private sector spending and, hence, the economy down with it.”
Dalio published his thoughts on Tuesday, Sept. 13, a day that recorded the market's worst sell-off since June 2020.
See Also: Dalio Calls Fed 'Naïve And Inconsistent' For Raising Interest Rates
Dalio, who manages more than $150 billion in assets, making Bridgewater the largest hedge fund in the world, made other predictions as well:
- Average Inflation Rate. The markets expect 2.6%. But his "guesstimate" is that it will be around 4.5% to 5% long-term, and "significantly higher" with economic shocks (i.e., wars in Europe and Asia, or environmental disasters).
- Inflation Will Fall Slightly. Certain shocks will resolve, but inflation will "trend back up" toward 5% over the medium term. Dalio is "very uncertain" about that estimate, and won't explain it because "that would take too long."
- The U.S. Yield Curve: It'll be “relatively flat” until there is "an unacceptable negative effect on the economy." Dalio also "guesstimates" inflation and real yields, and came up with between 4.5 and 6% in both long and short rates. The "higher end of this range would be intolerably bad for debtors, markets, and the economy."
Scott Minerd, the chief investment officer at Guggenheim Partners, also predicts stocks could be in for another 20% drop. He based his prediction on the S&P 500 price/earnings multiple historically trending lower when inflation is higher.
The annual change in the core price consumption expenditure index is currently at 4.6% and the S&P 500 is trading at a multiple of 19.
Since 1960, P/Es have trended lower when #inflation is higher. With YoY core PCE now at 4.6% and S&P500 trading at ~19x, we should see stocks fall another 20% by mid-October…if historical seasonals mean anything. pic.twitter.com/ZYOgxGXF5e
— Scott Minerd (@ScottMinerd) September 8, 2022
The SPDR S&P 500 ETF Trust (NYSE:SPY) and SPDR Dow Jones Industrial Average ETF (NYSE:DIA) are down 18% and 15%, respectively, year-to-date. The U.S. stock and bond markets, in general, have suffered double-digit losses over the previous 12 months.
See Also: These 5 Experts See A Market Crash Ahead: What Do BZ Readers Think?
Image: Courtesy of World Economic Forum via Flickr.
