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

For most of this year, the Fed has stuck to its goal of a “soft landing” for inflation, the idea of ​​defeating inflation without a dramatic economic downturn.

But despite several rate hikes, inflation is still running hot, and business leaders say the issue isn’t if a recession is coming, it’s when.

On Wednesday, following another rate hike and Fed Chair Jerome Powell’s pledge to stay the course until inflation eases, Bridgewater founder Ray Dalio said the Federal Reserve is likely to tighten further until high prices fall, no matter what the consequences. As a result, a recession is likely within the next year.

“You’re starting to see all the classic early signs,” he said during an interview with MarketWatch Editor-in-Chief Mark DeCambre during the outlet’s inaugural Best New Ideas in Money festival. Those signs, he said, are contraction in the housing and auto sectors, which are the first to be hit by the Fed’s higher interest rates.

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It’s not the first time Dalio has sounded the alarm about looming economic troubles. Back in June, he argued on LinkedIn that a soft landing was out of the Fed’s reach, even as Bridgewater beat the bear market in the first half of this year, giving investors a 32% return while other companies struggled.

Dalio’s comments followed the Fed’s decision this week to make its third straight 75 basis point rate hike this year. Prior to June, the last time the bank had raised rates this large was in 1994.

According to Dalio, these increases have already significantly slowed economic growth in the US.

“We’re very close to a 0% growth year right now,” he said. “I think it’s going to get worse in 2023 and then 2024, which has electoral implications.”

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Following the Fed’s rate hike on Wednesday, the S&P 500 fell 1.7% to a two-month low. Dalio joined other billionaire investors like Carl Icahn in saying the stock market will continue to fall this year as the Fed continues to hike rates, adding that the bond market will be particularly hard hit.

“Who is going to buy these bonds?” asked Dalio, noting that there has been a decade-long “bull market” in bonds, characterized by elevated prices. “Now you have negative real yields on bonds… and you’ve brought them down.”

Last month, Federal Reserve Chair Jerome Powell said the central bank will stop at nothing until inflation is brought under control, even if it means “some pain for households and businesses.”

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This week he was even more explicit on the costs: “We have to get inflation behind us. I wish there was a pain free way to do this. There is not any.”

That pain, Dalio said, will be felt very strongly in the years to come. “The Fed always has a trade-off between economic strength and inflation,” he said. With inflation now the bank’s target, it will steer a course until “economic pain” is seen as more serious than inflation.

At that point, the bank will start scaling back its rate hikes. “Now let’s play the game, what level will that be?” said Dalio.

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