Legendary investor Ray Dalio says the stock market has further to fall before a recession hits

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For a lot of this yr, the Fed has held steadfast to its function of a “soft landing” for inflation, the thought of vanquishing inflation with out a dramatic financial downturn.

But in spite of a number of rate of interest hikes, inflation is still running hot, and trade leaders are announcing that it’s no longer a topic of if a recession will occur, but if.

On Wednesday, after every other fee hike, and a promise from Fed chairman Jerome Powell to keep the path till inflation comes down, Bridgewater founder Ray Dalio stated that the Federal Reserve will most likely stay tightening its financial coverage till prime costs come down, regardless of the penalties. As a consequence, a recession is most likely inside of the subsequent yr.

“You’re starting to see all the classic early signs,” he stated during an interview with MarketWatch editor-in-chief Mark DeCambre right through the outlet’s inaugural Best New Ideas in Money pageant. Those indicators, he stated, are contraction in the housing and auto sectors, which might be the first to be impacted by means of the Fed’s upper rates of interest.

It’s no longer the first time Dalio has sounded the alarm on coming near near financial hassle. In June, he used to be already arguing on LinkedIn that a soft landing used to be out of the Fed’s achieve, whilst Bridgewater beat the bear market in the first half of this year, turning in a 32% go back to traders as different corporations struggled.

Dalio’s feedback adopted the Fed’s choice this week to institute its 3rd consecutive 75-basis-point fee hike this yr. Prior to June, the closing time the financial institution had made such a giant fee hike used to be in 1994.

Those hikes have already bogged down financial expansion considerably in the U.S., in accordance to Dalio.

“We are right now very close to a 0% growth year,” he stated. “I think it’s going to get worse into 2023 and then 2024, which has implications for elections.”

After the Fed’s fee hike on Wednesday, the S&P 500 fell 1.7% to a two-month low. Dalio joined different billionaire investors like Carl Icahn and stated that the stock market will sink further this yr as the Fed continues its hikes, including that the bond market might be hit in particular onerous.

“Who is going to buy those bonds?” Dalio requested, noting that there’s been a multi-decade “bull market” in bonds marked by means of increased costs. “Now you have negative real returns in the bonds…and you got them going down.”

Last month, Federal Reserve Chair Jerome Powell stated that the central financial institution will prevent at not anything till inflation is below keep watch over, even though it method “some pain to households and businesses.”

This week, he was even more clear about the cost: “We have got to get inflation behind us. I wish there were a painless way to do that. There isn’t.”

That ache, stated Dalio, might be very sorely felt over the following couple of years. “The Fed always has a tradeoff,” he stated, between financial power and inflation. With inflation now the financial institution’s goal, it’s going to chart a path till “economic pain” is deemed extra critical than inflation.

At that time, the financial institution will start to pare again on its fee hikes. “Now we play the game of, what level will that be?” stated Dalio.

This tale used to be at first featured on Fortune.com

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