Every so often, Wall Street sends a not-so-subtle reminder to investors that the stock market doesn't move up in a straight line -- even if it seems like it does sometimes (looking at you, 2021!). Last year, investors navigated their way through bear markets for the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite. The latter remains more than 20% below its all-time high, set in November 2021.
However, all three major stock indexes have bounced decisively off of their late-September/early-October lows and roared out of the gate to begin 2023. It has retail investors and professional money managers wondering if the worst is behind us.
But not everyone's on board with the idea that the U.S. economy and stocks have found their footing.
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This billionaire investor expects a rough two-year stretch for Wall Street
Founder and co-chief investment officer Ray Dalio of Bridgewater Associates is one of the world's richest people ($19.1 billion net worth) and arguably one of the best investors on Wall Street. But despite overseeing a sizable managed portfolio, Dalio isn't all that optimistic -- at least in the short run -- on the U.S. economy or stocks.
Back in September, in an interview with MarketWatch, Dalio cited a laundry list of concerns that he believes will weigh on the economy and stocks through 2024. In no particular order, they include:
- The Federal Reserve's aggressive pace of interest-rate hikes, which is tied to the inflation rate hitting levels not seen in 40 years.
- Russia's invasion of Ukraine, which threatens Europe's energy supply needs and can wreak havoc on energy commodity prices.
- Significant declines in the U.S. personal savings rate, which has collapsed following the end of federal stimulus programs.
- Concurrent declines in the housing market and auto industry.
- An increase in credit delinquency rates, which often precede and/or accompany U.S. recessions.
The concerns Dalio echoed line up perfectly with a number of U.S. recession probability indicators that I recently examined.
A reading below 43.5 has been a surefire indicator of a coming recession for the past 70 years. US ISM Manufacturing New Orders Index data by YCharts. Gray zones denote recessions.
The Federal Reserve Bank of New York's recession probability tool, the ISM Manufacturing New Orders Index, and the Conference Board Leading Economic Index are all in agreement that the U.S. is headed for a recession. All three of these indexes have been correct in their prognostications, without fail, for at least the past 56 years.
Ray Dalio sends an ominous warning to investors
Ray Dalio isn't just another billionaire offering his take on the economy and stock market. He's the co-CIO of the world's largest hedge fund, and he's allowing his actions to speak far louder than his words.
Recently, Bridgewater Associates filed its Form 13F with the Securities and Exchange Commission. A 13F is a required quarterly filing by money managers and ultrawealthy individuals with at least $100 million in assets under management. It's effectively a look under the hood at what the brightest minds on Wall Street have been buying, selling, and holding in the most recent quarter.
Bridgewater's 13F highlighted an alarming trend. Keeping in mind that Dalio runs a well-diversified fund with 820 holdings (a mix of stocks and exchange-traded funds), he and his team reduced stakes in 44 of the fund's top 50 positions.
In many instances, these weren't small pare-downs, either. Bridgewater's stakes in Procter & Gamble, Johnson & Johnson, PepsiCo, Coca-Cola, Costco Wholesale, and McDonald's were respectively reduced by 24%, 24%, 24%, 26%, 21%, and 25% from just three months prior (Sept. 30, 2022). These are 6 of Bridgewater's top 11 holdings. Although these are generally safe-haven companies with exceptional branding power, only Johnson & Johnson offers a reasonably low price-to-earnings ratio at the moment.
If Dalio is willing to pare back his investments in time-tested businesses, it's a clear warning to new and tenured investors alike that he foresees trouble on the not-too-distant horizon for stocks and the U.S. economy.
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Here's what Ray Dalio is buying in anticipation of a U.S. recession
The $64,000 question is: "If Dalio reduced Bridgewater's stakes in 44 of the 50 top holdings, what were the 6 stocks/exchange-traded funds that he and his team purchased during the fourth quarter?"
Once again, in no particular order, Dalio and his investment team purchased shares in:
- iShares Core S&P 500 ETF (IVV -0.04%)
- iShares MBS ETF
- Berkshire Hathaway (BRK.A -0.28%) (BRK.B -0.68%) -- specifically, Class B shares (BRK.B)
- McKesson
- Bank of America (BAC -0.13%)
- JPMorgan Chase (JPM 0.49%)
With the exception of money-center bank JPMorgan Chase, the other five holdings were existing positions as of September 30, 2022.
Although Dalio was very much a net seller of equities during the fourth quarter, what few buys he made in Bridgewater's top 50 appear calculated. For instance, adding shares of Bank of America and JPMorgan Chase makes sense given the historic pace of interest-rate hikes. Even if the U.S. dips into a recession and bank loan losses increase, the benefit of higher net interest income tied to outstanding variable-rate loans might outweigh loan losses and allow bank stock earnings to grow.
You'll note that Dalio and his investing team also continue to place their trust in the Oracle of Omaha, Warren Buffett. Berkshire Hathaway has run circles around the S&P 500 in the nearly 58 years Buffett has held the reins. What's more, Buffett gravitates to financial stocks, including Bank of America, which is his company's second-largest holding.
The addition to the iShares Core S&P 500 ETF -- Bridgewater Associates' largest position -- is also noteworthy. Despite taking a notably negative tone on equities over the next two years, Dalio remains committed to an index attempting to mirror the return of the S&P 500. Though Dalio is clearly a short-term bear, he appears to be positioning his fund to take advantage of a trade that's never failed long-term investors.
