Ray Dalio, founder of the world's largest hedge fund, Bridgewater Associates, says we're in a period similar to the markets in '04 to '06. Is he right?
The founder of the world's largest hedge fund says markets about to get… boring.
Ray Dalio, the man who started $150 billion Bridgewater Associates, said in an extremely rare interview with CNBC on Wednesday from Davos, Switzerland:
"We are now in the middle of a short-term debt cycle. In other words, you're out of the recession and you're not into yet the tightening. Those middle periods are kind of the boring years. You know, they're the years like 2004 – 2006. You forget that they even existed. What happened in 2004 - '06, you never remember; 2007 – '08, you remember. So, we're in that kind of a period in the United States."
Indeed, from the start of 2004 to the end of 2006, the markets were indeed remarkably tame. The Dow Jones Industrial Average was up 27.5% for those 36 months, about 1.5% less than it was in 2013 alone.
According to Talking Numbers contributor Richard Ross, Global Technical Strategist at Auerbach Grayson, the markets won't as dull as Dalio believes.
"Mark Twain once said, 'History does not repeat itself, but it does rhyme'," says Ross. "That's really the basis for technical analysis and Mr. Dalio's point making that comparison to a previous period in the market. But I think he has his years off."
Ross compares two chart of the Dow to make his point. The first looks at a period from 1999 to 2007, the second is from 2007 to 2014. According to Ross, both share several main features in this
- Bubbles that are about to burst (tech in 1999, housing in 2007)
- Large drops in value
- Head and shoulders bottoms
- Sharp rallies
- "Boring" periods
- Breakouts to all-time highs
Where Ross disagrees with Dalio is, of course, where the "boring period" period is located similar to 2004 – 2006. Dalio sees the markets currently entering that phase while Ross believes it already happened in the time between 2010 and 2012. However, Ross doesn't believe the markets will crash the way it did after the 2007 breakout.
"This time, I think history is different," says Ross. "It does not repeat itself. I think this breakout actually works higher and it does not fail. I think the market has really started another leg up."
Though Ross sees the potential of a short-term correction, he doesn't think it will sustain for long.
"This time is different," says Ross." The market is going higher. I don't think this is going to be a forgettable period whatsoever."
Agreeing with Ross is John Stephenson, portfolio manager at First Asset Investment Management. While the big story during 2013 was the growing price of the market relative to earnings, the markets are now looking for higher earnings growth, according to Stephenson. He believes that will come from higher revenues due to a growing economy in the United States.
"What we're looking for and what economists are cheerleading is the US is going to grow at 3% or above this year," says Stephenson. "That's the best performance in a decade. That translates into roughly 7.5% earnings growth. This is the first time I can remember when economists have been more positive than the analysts that cover these stocks. So, this is a rare occurrence."
Stocks are also going to benefit because investors lack better choices, says Stephenson.
"When you look at all alternatives – whether it's commodities, real estate, stocks, or bonds – stocks come out ahead," says Stephenson. "I think this is where you want to be. Ultimately, it won't be in every company but it will be in the vast majority of companies and the market goes higher."
To see the rest of the analysis of the markets by Stephenson on the fundamentals and Ross on the technicals, watch the video above.
More from Talking Numbers:
- Private Equity & Hedge Funds
- Ray Dalio
- Bridgewater Associates