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✅ Key idea:
Key takeaways
- “There’s definitely a bubble in the markets” these days, says hedge fund legend Ray Dalio.
- Although the presence of a bubble does not mean one should sell, “make sure you are protected,” he said.
Do you think market bubble talk is over after Nvidia’s recent earnings? No one told Ray Dalio.
“There’s definitely a bubble in the markets,” Ray Dalio, founder of hedge fund Bridgewater Associates, said in an interview with CNBC Thursday morning. “But we haven’t figured out how to prick the bubble yet.”
Maybe investors are listening. Major stock market indexes were recently in the red, giving back gains after Nvidia’s (NVDA) results appeared to ease fears that the AI rally was due to hot air. And when the balloon is inevitably pricked, according to Dalio, it will not be protected or caused by very good or very bad numbers for one company.
“Bubbles don’t burst because people wake up one morning and decide there won’t be enough revenue and profits to justify the price,” he wrote in a blog post Thursday morning.
Why does this matter to you?
Nvidia’s earnings report was flashy enough to calm investor fears and stir up market sentiment. But one well-known investor says we’re still in a bubble, even if we don’t know when it will burst.
Instead, he said, bubbles occur when people decide they need to trade financial wealth — such as that represented by assets with inflated values — for hard cash. What follows is a decline in markets and economies as well as major political change, he said.
Dalio does not advise investors to sell just because there is a bubble. However, he recommends protection, such as owning gold, for example, or eliminating any “significant credit exposures.”
The ratio of US stock wealth to total money today resembles the historical peaks seen in the run-up to the Great Crash of 1929 and the dot-com bubble of the 2000s, Dalio suggested in his blog, implying that the next 10 years of real returns in stocks — that is, price appreciation adjusted for inflation and other effects — are largely zero.
He is not the only one who predicts the poor future returns indicated by market indicators. GMO’s 7-year forecast, which uses valuations to estimate potential real returns, was already negative as of the end of September; It was ten basis points worse as of the end of last month, with US large- and small-cap stocks showing negative real returns whether interest rates remained normal or fell.
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