Ray Dalio expects stocks to fall 20% if rates rise to 4.5%
Billionaire Ray Dalio, the founder of one of the world’s biggest hedge funds, is predicting a deep plunge in stock markets as the U.S. Federal Reserve raises interest rates aggressively to tame inflation. He isn’t the only one predicting a major downfall in both the U.S. and global economy.
“I estimate that a rise in rates from where they are to about 4.5 percent will produce about a 20% negative impact on equity prices,” the Bridgewater Associates’ founder Dalio wrote in a LinkedIn post on Tuesday.
His comments arrived after data showed that U.S. consumer prices increased in August.
“…interest rates will go up … other markets will go down … the economy will be weaker than expected,” Dalio wrote.
“This will bring private sector credit growth down, which will bring private sector spending and, hence, the economy down with it.”
Dalio’s bearish view further ignites concerns about valuations in U.S. stocks.
While the S&P 500 index’s forward price-to-earnings multiple is far below what it commanded at the start of the year, investors believe stock valuations may have to fall further to reflect the risks of rising bond yields and a looming recession.
Mortgages in the US surpassed the 6% level this week. This is the first time that the 30-year fixed mortgage has reached 6% since 2008 during the Great Recession.
Unsurprisingly, refinances continue to decline and fell 4% for the week and 83% YoY. Mortgage applications plummeted 29% YoY.
“A significant economic contraction will be required, but it will take a while to happen because cash levels and wealth levels are now relatively high,” Dalio wrote.
“We are now seeing that happen. For example, while we are seeing a significant weakening in the interest rate and debt dependent sectors like housing, we are still seeing relatively strong consumption spending and employment.”
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