Billionaire investor Ray Dalio — who founded the world's largest hedge fund, Bridgewater Associates — in a new interview warned that the stock market is a bubble "halfway" to the magnitude of those that triggered historic market crashes like the dot-com bust and the Great Depression.
Speaking with Yahoo Finance, he cautioned that some high-performing stocks have benefited from single-minded speculative trading focused on price, and he attributed recent market volatility to a rotation toward "meat and potatoes" companies that didn't benefit from pandemic trades as much as some tech firms.
"What's happened is that — like a lot of cycles go — a lot of new ideas, new technologies, new things come along, and they make fabulous revolutions," he says. "And they grow things — and that's great."
"But there's a tendency of investors to extrapolate the past and not pay too much attention to price, and when that happens you start to emerge as somewhat of a bubble," adds Dalio, the co-chairman and co-chief investment officer of Bridgewater Associates, which holds about $150 billion assets under management.
"By our measures, the bubble is not what it was in 2000 and not what it was in 1929," he says. "But it's kind of like halfway there."
Growing fears of a bubble
The warning from Dalio echoes growing concerns among some investors. But a recent note from Goldman Sachs tamped down such anxieties, arguing that the risk of an imminent bubble is "relatively low."
Despite the onset of the pandemic last year, the S&P 500 (^GSPC) ended 2020 with a total return of about 18%, buoyed by tech giants that benefited from the increased popularity of services like e-commerce and streaming entertainment as COVID-19 shutdowns forced people into their homes.
But some of the major tech names and pandemic trades have struggled so far in 2021. For instance, Amazon (AMZN) is down 5.2% this year, as of Thursday morning; and teleconference company Zoom (ZM) has fallen 6.6%. Meanwhile, other stocks like Facebook (FB) and Microsoft (MSFT) have continued to climb.
Dalio spoke to Yahoo Finance Editor-in-Chief Andy Serwer in an episode of “Influencers with Andy Serwer,” a weekly interview series with leaders in business, politics, and entertainment.
At age 26, Dalio launched Bridgewater Associates, now the world's largest hedge fund. He compiled lessons learned at the firm in a best-selling book published four years ago called "Principles." He boasts a net worth of $20.3 billion, according to Forbes.
While some of the high-flying tech stocks begin to drag, money has shifted toward traditional companies excluded from the pandemic-era speculative trades, Dalio said.
"The kind of the meat and potatoes type of companies didn't benefit as much from those and they're fairly stable," he says. "So that's why you're starting to see that kind of rotation."
The latest round of stimulus checks may interrupt the current market shift, Dalio said. Analysts at Deutsche Bank estimated last month that the latest round of stimulus checks could pump $170 billion into the stock market.
"Now that can change — it can come and go in these phases — like when people get stimulus checks, and then you know, they might be hot on the exciting things and they run up again," he said.