Billionaire hedge fund manager Ray Dalio said the risks of a recession in the next 18 to 24 months are rising and bonds are past their peak.
In a LinkedIn post on Monday, Dalio said the U.S. is further along in the business cycle than he thought and that it’s difficult to make a call on equities.
“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,” said Dalio, manager of the world’s largest hedge fund.
Dalio’s comments come after the S&P 500 index has posted its worst rout in two years on concern over rising borrowing costs. The pressure on equities has been emanating from the Treasury market and the outlook for inflation. The Federal Reserve will face growing pressure to increase interest rates after a nearly $300 billion spending package signed into law Friday juices a U.S. economy already souped up on a $1.5 trillion tax cut.
"There is a whole lot of hitting the gas into capacity constraints that will lead to nominal rate rises driven by the markets,” Dalio wrote. “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.”
While many investors are focusing on the U.S.’s potential economic strength in 2018, “we are focusing more on 2019 and 2020 (which is the next presidential election year),” he said in today’s post. “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.”
A week ago, Dalio said the sell-off in equity markets — which at that point was just beginning — was a minor correction typical of late-cycle behavior.
At the World Economic Forum in Davos last month, Dalio said he expected the Federal Reserve to tighten monetary policy faster than they have signaled. He said while economic growth is in the late stage of the cycle, it could continue to improve for another two years.
Dalio also said then that the economic environment was good for stocks but bad for bond investors, and that “it feels stupid to own cash in this kind of environment. It’s going to be great for earnings and great for stimulation of growth.”
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