Bridgewater Associates founder Ray Dalio said on Monday that he thinks the risk of a recession between the next 18 to 24 months is rising, partly due to how and when the U.S. Federal Reserve decides to raise interest rates.
“We don’t know exactly how far we are from the top in the stock market and then the economy, though it is clear that we are past the top in the bond market,” Dalio wrote in a LinkedIn post published Monday. “What we do know is that we are in the part of the cycle in which the central banks’ getting monetary policy right is difficult and that this time around the balancing act will be especially difficult.”
Dalio’s LinkedIn post comes as the stock market has entered into a correction period, with the Standard & Poor’s 500 stock index falling 10 percent between Friday, January 26 and Thursday, February 8. Since Thursday, though, the S&P 500 has risen slightly.
Dalio’s sentiments echo comments Bridgewater’s co-chief investment officer Bob Prince made to the Financial Times on February 11, in which he envisioned a coming “shakeout” in the market.
In the post, entitled “It’s All Classic: The Main Questions are About Timing and What the Next Downturn Will be Like,” Dalio wrote that in a late stage of the short-term debt cycle, it’s common to see high demand and high profits. This typically results in central banks tightening monetary policy, which causes the prices of stocks and other assets to fall, he wrote.
“We know that we are in the ‘late-cycle’ part of the short-term debt/business cycle with the conditions I described at the beginning now existing, but we don’t know precisely where we are,” Dalio wrote.
He added that he had thought the market had reached its top about ten days ago. However, “recent spurts in stimulations, growth and wage numbers” signaled to Dalio that the market is in a different position than he initially thought.
In response, Bridgewater plans to focus on what 2019 and 2020 will look like from an economic perspective.
“While most market players are focusing on the strong 2018, we are focusing more on 2019 and 2020 (which is the next presidential election year),” Dalio wrote on LinkedIn. “Frankly, it seems to be inappropriate oversight to not be talking about the chances of a recession and what that recession might look like prior to the next election.”
And while today’s short-term debt market may seem to be typical, Dalio wrote that he is concerned about two major differences in today’s market conditions as compared to previous conditions.
“They are that 1) there is such a big gap between the haves and the have-nots (which creates social and political sensitivities) and 2) the powers of central banks to reverse contractions are more limited than they have ever been (because interest rates are so low and quantitative easing is less effective),” he wrote. “For these reasons, I worry about what the next economic downturn will be like, though it is unlikely to come soon.”
Prince told the Financial Times on Sunday that he thinks the market shakeout he is predicting won’t be over in a matter of days. According to Prince, market turbulence is likely to continue.