Market Watch: If Ray Dalio 1937 Comparison Continues Tracking, the Market is in Big Trouble
Article by Shawn Langlois on Market Watch
Back in 2015, Ray Dalio, the billionaire founder of hedge-fund giant Bridgewater Associates, compared the economic climate at the time to the one Americans grappled with some 80 years ago.
Here are the key points he made:
- Debt limits reached at bubble top, causing the economy and markets to peak (1929 & 2007)
2. Interest Rates hit zero amid Depression (1932 & 2008)
3. Money printing starts, kicking off a beautiful deleveraging (1933 & 2009)
4. The Stock Market and “Risky Assets” rally (1933-1936 & 2009 & 2017)
5. The economy improves during a cyclical recovery (1933-1936 & 2009-2017)
6. The Central Bank tightens a bit, resulting in a self-reinforcing downturn (1937)
“The combination of these monetary and fiscal tightening pressures created a significant selloff in risk assets,” Dalio wrote. “Stocks fell the most, but home prices arrested their gains and dipped negative as well.”
Fast forward three years and Jesse Felder of the popular Felder Report blog says the analog is tracking better than ever. If it continues, one look at this then-and-now chart of the S&P 500 should have investors worried:
"The correlation between the S&P 500 over the past four years and the four years leading up to the 1937 top is roughly 94%,” Felder explained. “As I have suggested in the past, price analogs are not very valuable on their own but when the fundamentals also parallel closely they become far more interesting.”
If this one has it right, big losses could be on the way!
“It seems ‘central bank tightening into a self-reinforcing downturn’ is becoming a more distinct possibility as the economic cycle ages and inflation pressures grow,” Felder wrote. “In other words, ‘the policy stakes are now very high,’ and history provides a clear road map for markets.”