Ray Dalio warns of the consequences of US central bank policy: the stock market could collapse by 20 percent – these stocks cushion the fall

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

Fed hikes interest rates by 0.75 percentage points

Only in September did the US Federal Reserve raise interest rates again. After the monetary authorities recently raised the interest rate by 0.75 percentage points to between 3.0 and 3.25 percent, as expected, fears of a recession caused by the tightening monetary policy could be triggered in the US. Ray Dalio, entrepreneur and founder of the asset manager Bridgewater Associates, also expects that the economy will be under pressure due to high inflation rates and the resulting increases in key interest rates and will therefore also have a negative impact on the stock market, as he writes in a text article on the LinkedIn careers portal .

Negative economic impact expected

According to the expert, there is a familiar pattern: first prices rise, then central banks raise interest rates in order to control the amount of money and credit available. “Interest rates relative to inflation rates, ie real interest rates, have a big impact,” Dalio said. The consequences of the interest rate hikes will then be felt on the markets. The prices of stocks and the majority of other income-generating assets are falling because, on the one hand, income is stagnating and there is generally less money available for investing, and on the other hand, asset prices would also have to fall in order to still achieve attractive returns. “As investors know that these events will slow earnings growth, this will also reflect in capital goods prices, which in turn will impact the economy,” the hedge fund manager continued.

Relationship between interest rate and inflation rate

The crucial factor here is the relationship between interest rates and the rate of inflation. “When central banks set low interest rates relative to the rate of inflation and provide ample credit, they encourage a) borrowing and spending and b) investors’ selling of debt instruments, such as bonds, and the purchase of inflation-linked assets , which accelerates economic growth and increases inflation,” said Dalio. “And of course the reverse is also true, ie if they set interest rates high relative to inflation and tighten the supply of money and credit, they have the opposite effect.” The situation will therefore level off at the point where both values ​​are bearable. This is an optimization process that is comparable to “solving a simultaneous equation”, as the Bridgewater founder notes.

Stock market decline warning

According to Dalio, the long-term inflation rate in the USA should level off between 4.5 and 5 percent. “I think interest rates need to rise very sharply (towards the upper end of the 4.5 to 6 percent range) and that a significant decline in private credit will limit spending “, according to the market expert. “This will lead to a slowdown in private sector credit growth, which in turn will constrain private sector spending and, in turn, the economy.” Not only is this likely to have implications for the current discount rate, but income from assets will also decline 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 would suffer particularly from the interest rate hike, while the losses on investment products with shorter maturities should be smaller. Incomes are likely to fall by ten percent. “The bottom line is that I think it’s likely that the inflation rate will be well above what the people and the Fed want (while the annual inflation rate will go down), that interest rates will go up, that other markets will go down, 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,” the hedge fund manager summarizes.

Standard values ​​as a safeguard?

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

T-Mobile US delights with customer growth and share buyback

This also includes the shares of the US Deutsche Telekom subsidiary T-Mobile US. While the mobile operator 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 conclude around three million new contracts at 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 stable at 19.7 billion US dollars, while net cash flow increased by 11 percent to 4.2 billion US dollars. In September, AT&T and Verizon’s competitor also announced plans to buy back shares worth up to $14 billion.

This also seems to delight Dalio: In the second quarter the hedge fund manager bought 167,283 additional T-Mobile shares and thus held 481,462 shares with a total value of 64.8 million US dollars as of the reporting date.

T-Mobile share “best positioned”

Cowen analyst Gregory Williams was also optimistic about the stock, as TipRanks writes. “We view 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, greenfield growth opportunities) but also from a macroeconomic and equity perspective (Use of sprint synergies for FCF/share increases, creation of earnings visibility) is best positioned,” the portal quotes the strategist as saying. “Despite the ‘overcrowded long’ position, momentum remains for further share price gains, 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 to up to 187 US dollars, according to Williams’ assessment. Most recently, the share cost 134.17 US dollars on the NASDAQ (closing price on September 30, 2022).

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

CVS grows sales – and acquires Signify Health

The second stock among Dalio’s favorites is pharmacy 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 in the previous year. Not only was the US retailer recently able to pay off $1.5 billion in debt, it also paid a dividend of $0.55 per share effective August 1.

The agreement concluded in September to acquire the healthcare platform Signify Health also shows CVS’ 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. As of the end of June, he held 3,146,236 shares, which were valued at US$291 million.

“Win-Win-Win Environment”

In addition to the Bridgewater founder, JPMorgan strategist Lisa Gill is also enthusiastic about the pharmaceutical company’s shares. “We believe this brings CVS closer to its goal of managing more lives through value-based foster relationships,” TipRanks quoted the expert as saying. “With 2.5 million in-home 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 price target of $130. Most recently, the note on the NYSE cost US$ 95.37 (closing price on September 30, 2022).

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

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