Reuters. FILE PHOTO: Ray Dalio, Bridgewater’s co-chairman and co-chief investment officer, speaks through the Skybridge Capital SALT NY 2021 conference in NEW YORK, U.S., September 15, 2021. REUTERS/Brendan McDermid
(Reuters) – Billionaire Ray Dalio, founder of 1 of the world’s biggest hedge funds, has predicted a sharp plunge in stock markets because the U.S. Federal Reserve raises interest levels aggressively to tame inflation.
“I estimate a rise in rates from where they’re to about 4.5 percent will produce in regards to a 20 percent negative effect on equity prices,” Bridgewater Associates’ founder Dalio wrote in a LinkedIn post on Tuesday.
His comments came your day data showed U.S. consumer prices unexpectedly rose in August. The inflation data raised fears of another outsized interest hike in a few days and sent stock markets right into a unpredictable manner.
“…interest levels will rise … other markets will decrease … the economy will undoubtedly be weaker than expected,” Dalio wrote.
“This can bring private sector credit growth down, that may bring private sector spending and, hence, the economy down with it.”
Dalio’s bearish view further ignites concerns about valuations in U.S. stocks.
As the ‘s forward price-to-earnings multiple is far below what it commanded in the beginning of the year, investors believe stock valuations may need to fall further to reflect the risks of rising bond yields and a looming recession.
Rising mortgage rates already are weighing on the housing sector because the average interest on typically the most popular U.S. mortgage loan rose above 6% for the very first time since 2008.
A substantial economic contraction will undoubtedly be required, nonetheless it will take some time to occur because cash levels and wealth levels are actually relatively high, Dalio wrote.
“We have been now since happen. For instance, while we have been seeing a substantial weakening in the interest and debt dependent sectors like housing, we have been still seeing relatively strong consumption spending and employment.”