(Reuters) – Billionaire Ray Dalio, founder of one of the world’s largest hedge funds, has predicted a sharp decline in stock markets as the US Federal Reserve aggressively raises interest rates to tame inflation.
“I estimate that an increase in rates where they are to about 4.5 percent would have a negative impact of 20 percent on stock prices,” Dalio, founder of Bridgewater Associates, wrote in a LinkedIn post.
His comments came on the day data showed that US consumer prices rose unexpectedly in August. Inflation data raised fears of another massive interest rate hike next week and sent stock markets into a downward spiral.
“…interest rates will rise…other markets will fall…the economy will be weaker than expected,” Dalio wrote.
“This will lead to lower private sector credit growth, which will lead to lower private sector spending, and thus the economy with it.”
Dalio’s bearish outlook is adding to concerns about valuations in US stocks.
While the forward price-to-earnings multiplier is much lower than requested at the start of the year, investors believe stock valuations may have to fall further to reflect the risks of higher bond yields and a looming recession.
Rising mortgage rates are already weighing on the housing sector as the average interest rate on the most popular mortgage in the US rose above 6% for the first time since 2008.
Dalio wrote that a major economic downturn would be required, but that it would take some time because cash levels and wealth levels are now relatively high.
“We’re now seeing that happening. For example, while we’re seeing significant weakness in the interest rate and debt-dependent sectors like housing, we’re still seeing relatively strong consumer spending and employment.”