Billionaire Ray Dalio warns stocks could drop 20% if interest rates rise to 4.5%

Billionaire Ray Dalio, founder of one of the world’s largest hedge funds, has warned that stocks could fall further this year after hotter-than-expected inflation data in August rocked markets this week.

“It looks like interest rates should go up a lot (toward the higher end of the 4.5% to 6% range),” the Bridgewater Associates founder wrote on LinkedIn. Article – Commodity Tuesday. “This will lead to lower private sector credit growth, which will lead to lower private sector spending and thus the economy with it.”

The S&P 500 is already down more than 6% this week on fears of demise sky swellsHigh interest rates and a gloomy economic outlook continue to weigh on the market. Meanwhile, the Dow Jones Industrial Average is down more than 1,800 points, while the heavy Nasdaq Composite is down about 1.7%.

If interest rates rise to 4.5%, Dalio said, it would lead to a roughly 20% drop in stock prices based on the effect of the current value discount. In addition, there will be another negative effect of 10% from the decrease in income.

Inflation rose faster than expected in August, driving up prices painfully

The current benchmark Fed Funds range of 2.25% to 2.50% is around the “neutral” level, which means it is neither supportive nor constrained The economic activity. However, Federal Reserve Chairman Jerome Powell suggested that a restrictive stance would certainly be necessary as the central bank tries to put pressure on the economy.

One of the reasons Dalio thinks interest rates will go up that much this year is because he thinks the market is understating where inflation will end. While the market expects inflation to hover around 2.6% over the next decade, Dalio estimated that the real rate would be closer to 4.5% to 5%, barring any major economic shocks.

The result is that it seems likely to me that the rate of inflation will remain much higher than what people and the Federal Reserve want (while the rate of inflation will fall on an annual basis), that interest rates will rise, etc. Without considering the deteriorating trends in internal and external conflicts and their effects.

Jerome Powell, US Federal Reserve Chairman, speaks during a press conference following the Federal Open Market Committee (FOMC) meeting in Washington, DC, on May 4, 2022 (Photo: Al Drago/Bloomberg via Getty Images) (Photo: Al Drago / Bloomberg via Getty Images / Getty Images)

Dalio’s comments come a few days after the Labor Department announced that its August CPI came in hotter than expected. Prices rose 0.1% month over month and 8.3% year over year, dashing analysts’ hopes for a monthly decline.

Stocks fell sharply on Tuesday after a surprisingly hot report on fears of more aggressiveness feed itwith the Dow down 1,276 points – the worst day since June 2020.

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Investors are already preparing for the Federal Reserve’s policy-setting meeting next week, which is scheduled for September 20-21. Traders are betting that officials will agree to another significant rate increase of 75 basis points – the third of its kind this year – at the conclusion of the meeting, although some Wall Street I think central bankers can get bigger by increasing the full points.