Crash Ahead: Ray Dalio Warns of Consequences of US Federal Reserve Policy: Stock Market Could Collapse 20 Percent – These Stocks Are Mitigating the Fall | news

• The Fed raises interest rates again
• Ray Dalio expects an interest rate of between 4.5 and 6 per cent
• Negative impact on the stock market

The Fed raises interest rates by 0.75 percentage points

Only in September did the US central bank raise interest rates again. After monetary authorities recently raised interest rates by 0.75 percentage points to between 3.0 and 3.25 percent, as expected, there are fears of a recession caused by the tightening monetary policy can be triggered in the United States. Ray Dalio, entrepreneur and founder of asset manager Bridgewater Associates, also expects that the economy will be under pressure due to high inflation and the resulting increases in policy rates and will therefore also have a negative impact on the stock market, as he writes in an op-ed on LinkedIn’s career portal.

A negative economic effect is expected

According to the expert, there is a well-known pattern: First, prices rise, then central banks raise interest rates to control the amount of money and credit available. “Interest rates relative to inflation rates, i.e. real interest rates, have a big impact,” Dalio said. The consequences of the interest rate increases will then be felt on the markets. The prices of stocks and the majority of other income-generating assets fall because, on the one hand, income stagnates and there is generally less money available to invest, and on the other hand, asset prices will also have to fall. to still achieve attractive returns. “Since investors know that these events will slow down earnings growth, this will also be reflected in the prices of capital goods, which in turn will affect the economy,” the hedge fund manager continued.

Relationship between interest and inflation

The decisive factor here is the relationship between interest rates and the inflation rate. “When central banks set interest rates low relative to the rate of inflation and provide ample credit, they encourage a) borrowing and consumption and b) investors’ sales of debt instruments, such as bonds, and purchases of inflation-linked assets, accelerating economic growth and increasing inflation,” said Dalio. “And of course the reverse also applies, that is, if they set interest rates high in relation to inflation and tighten the supply of money and credit, they have the opposite effect.” The situation will therefore level out at the point where both values ​​are tolerable. This is an optimization process comparable to “solving a simultaneous equation,” as the Bridgewater founder notes.

Warning of fall in the stock market

According to Dalio, long-term inflation in the US should level off between 4.5 and 5 percent. “I think that the interest rate will have to rise very strongly (toward the upper end of the range of 4.5 to 6 percent) and that a significant decrease in private credit will limit spending”, according to the market expert. “This will lead to a slowdown in private sector credit growth, which will in turn constrain private sector spending and, in turn, the economy.” Not only is this likely to impact the current discount rate, but income from assets will also fall due to the weak economy. Specifically, Dalio predicts that an increase in US interest rates to 4.5 percent will cause the stock market to collapse by an average of 20 percent. Assets with longer maturities will especially suffer from the interest rate increase, while losses on investment products with shorter maturities should be smaller. Income is likely to decrease by ten percent. “The bottom line is that I think it’s likely that the inflation rate will be well above what the public and the Fed want (while annual inflation will fall), that interest rates will rise, that other markets will fall, and that the economy will be weaker than expected, and all without taking into account the worsening trends in internal and external conflicts and their impact,’ sums up the hedge fund manager.

Default values ​​as a safeguard?

This means that the cards in the market will likely be reshuffled. So how should investors position themselves? According to the analysis platform “TipRanks”, which collects ratings from several strategists, Dalio is considered a supporter of default values. In its own database, two blue-chip stocks have therefore been found, which are recommended for purchase not only by Dalio himself, but also by the majority of analysts.

T-Mobile US welcomes customer growth and share buybacks

This also includes the shares in the American Deutsche Telekom subsidiary T-Mobile US. While the mobile carrier suffered a loss of more than $108 million, or 9 cents per share, in the second quarter of 2022 due to expenses related to the merger with Sprint in 2020, the company was able to score points in customer acquisition. The Telekom subsidiary was able to sign around three million new contracts by the end of the second quarter, of which almost 1.7 million went back to postpaid customers. In terms of sales, T-Mobile US remained flat at US$19.7 billion, while net cash flow rose 11 percent to US$4.2 billion. In September, AT&T and Verizon’s competitor also announced plans to buy back up to $14 billion in shares.

This also seems to inspire Dalio: In the second quarter, the hedge fund manager bought 167,283 more T-Mobile shares, bringing it to 481,462 shares worth a total of US$64.8 million as of the reporting date.

T-Mobile share “best placed”

Cowen analyst Gregory Williams was also bullish on the stock, as TipRanks writes. “We see the print and upside guidance for 2022 as confirmation of our thesis that T-Mobile is a strong player in the wireless group, not only from a microeconomic perspective (best network, best value, green growth opportunities) but also from a macroeconomic and Equity perspective (Using sprint synergies for FCF/equity increases, creating earnings visibility) is best placed,” the portal quotes the strategist as saying. “Despite the ‘crowded long’ position, momentum for further share price gains remains, in the spirit of T-Mobile. As such, we continue to view T-Mobile as best positioned in this challenging environment as fundamentals continue to thrive… “In the long term, the paper could jump up to US$187, according to Williams’ assessment. Most recently, the stock cost US$134.17 on NASDAQ (closing price on September 30, 2022).

Williams joins his peers with his assessment: A total of 14 strategists have given T-Mobile stock a positive rating on the platform, and there are no “hold” or “sell” recommendations. The average target price is $174.38.

CVS increases sales – and acquires Signify Health

The other stock among Dalio’s favorites is the drugstore chain CVS. In the second quarter of 2022, the provider of medicines, hygiene products and staple foods had sales of 80 billion US dollars on the books, which corresponds to an increase of eleven percent compared to the same quarter of the previous year. Not only was the US retailer recently able to pay down $1.5 billion in debt, it also paid a dividend of $0.55 per share. share with effect from 1 August.

The agreement reached in September to buy the healthcare platform Signify Health also shows CVS’s current strong position. The provider has about 10,000 doctors in the US and went to the pharmacy chain for an amount of US$8 billion.

The strong data should also please Dalio, who had a total of 1,935,319 CVS shares in his portfolio in the second quarter of 2022. At the end of June, he had 3,146,236 shares, which were valued at $291 million.

“Win-Win-Win Environment”

In addition to the Bridgewater founder, JPMorgan strategist Lisa Gill is also bullish on the pharmaceutical company’s stock. “We believe this brings CVS closer to its goal of managing more lives through value-based care relationships,” TipRanks quoted the expert as saying. “With 2.5 million home visits and virtual patient visits, we believe Signify will provide CVS with additional opportunities to best serve patients. With a network of virtual and in-person options, CVS has the ability to bend the cost curve in a value-based care environment and so .” create a win-win-win environment for the patient/payer/CVS.” So it should come as no surprise that Gill gave CVS stock an “Overweight” rating and a $130 price target. The stock last traded at $95.37 on the NYSE (closing price on 30 September 2022).

A total of nine analysts named on the platform recommend buying the stock, while two experts recommend holding the stock. The average price target of US$123 is still well above the current price level.


This text is for informational purposes only and does not constitute an investment recommendation. GmbH excludes any claim for recourse.

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