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Ray Dalio Does the Math: Charges at 4.5% Would Sink Shares by 20%
By Ye Xie on September 14, 2022 at 4:16 PM EDT
Ray Dalio got here out with a dismal prediction for shares and the economic system after a hotter-than-expected inflation print rattled monetary markets across the globe this week.
“It appears to be like like rates of interest must rise so much (towards the upper finish of the 4.5% to six% vary),” the billionaire founding father of Bridgewater Associates LP wrote in a LinkedIn article dated Tuesday. “This can deliver personal sector credit score development down, which can deliver personal sector spending and, therefore, the economic system down with it.”
A mere enhance in charges to about 4.5% would result in an almost 20% plunge in fairness costs, he added.
The speed market suggests merchants have totally priced in a 75-basis-point hike subsequent week by the Federal Reserve, with a slight likelihood for a full share level transfer. Merchants count on the Fed fund fee to peak at about 4.4% subsequent yr, from the present vary of two.25% and a couple of.5%.
Dalio famous buyers should still be too complacent about long-term inflation. Whereas the bond market suggests merchants expect a mean annual inflation fee of two.6% over the following decade, his “guesstimate” is that the rise shall be round 4.5% to five%. With financial shocks, it might be even “considerably greater,” he added.
Dalio mentioned the US yield curve shall be “comparatively flat” till there may be an “unacceptable damaging impact” on the economic system.
A deepening inversion of key curve measures — seen by many as a possible harbinger of recession — has helped reinforce a extra downbeat view about financial exercise amongst buyers.
Traders, speculating that the Fed will tip the economic system into recession subsequent yr within the combat to curb inflation, already see coverage makers easing charges within the later levels of 2023.
The S&P 500 is heading for its largest annual loss since 2008, whereas Treasuries have suffered certainly one of their worst beatings in many years.
— With help by Michael Mackenzie, and Edward Bolingbroke
