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Two opposing views from Wall Street gurus will only add to investor anxiety as the market finishes the week deep in the red.
That S&P/ASX 200 Index (ASX:XJO) was down 1.4% on Friday at 6,747 and is down around 3% over the past week.
The weakness will come as no surprise to many as history has shown that September and October are among the worst times of the year for global equity markets.
What is the next move of the market?
But those debating whether to buy the dip for the much-anticipated Christmas rally are torn by conflicting forecasts from Cathie Wood and Ray Dalio.
Wood is the founder of Ark Investment Management and was named 2020’s Top Stock Picker of 2020 Bloomberg. Dalio is a billionaire investor and founder of the world’s largest hedge fund, Bridgewater Associates.
Wood is taking advantage of market weakness to buy shares while Dalio warns of another sharp drop in stocks.
The inflation outlook will determine market direction
Their opposing views can essentially be reduced to inflationary expectations. Ark Investment bought 27 shares on Tuesday amid the sharpest sell-off on NASDAQ-100 (NASDAQ:NDX) since March 2020, reported Bloomberg.
Wood is playing chicken with the Federal Reserve. The Fed unleashed market volatility by aggressively raising interest rates to control runaway inflation.
The buying spree is likely related to Wood’s prediction that high inflation will soon turn into deflation.
Since inflation is bad for stock valuations, deflation is likely to have the opposite effect. This is especially true for technology stocks, which have borne the brunt of the market sell-off.
Warnings of a new bear market
But not many would share her view on deflation. If anything, Ray Dalio thinks the market is underestimating the inflation problem.
In a tweet to his 234,000 followers, Dalio said:
Markets in the US are currently pricing in inflation of 2.6 percent over the next 10 years. My estimate is that it will be around 4.5 to 5 percent over the long term barring shocks (e.g. worsening economic wars in Europe and Asia or more droughts and floods) and significantly higher during shocks.
He also predicts that interest rates will also need to rise to around 4.5%, causing stock prices to fall by 20%. A peak-to-through decline of 20% or more would officially put stocks in a bear market.
Stupid take away
However, Dalio emphasized that these are only “estimates”. Who can blame him when central banks are so wrong in their inflation forecasts?
Perhaps the more important lesson from history is don’t try to find market bottoms. Over the long term, die-hard investors have found good returns by buying quality stocks, regardless of the market cycle.
