The head of the world's largest hedge fund said Monday that the latest sell-off in stocks and bonds is evidence of typical market behavior in the later parts of a cycle and has come sooner than the firm expected.
"What we are seeing is typical late-cycle behavior, though more exaggerated because the durations of investment assets (i.e., their sensitivities to interest rate changes) are greater," Bridgewater Associates founder and co-Chief Investment Officer Ray Dalio said in a LinkedIn blog post titled "We've just had a taste of what the tightening will be like."
"Fiscal stimulation is hitting the gas, which is driving the economy forward into the capacity constraints, which is triggering interest rate increases that are hitting the brakes, first in the markets and later in the economy," Dalio wrote, adding that "this is happening sooner than we expected."
Friday's jobs report showed that wages grew at an annualized pace of 2.9 percent in January, the fastest since 2009. Overall, the U.S. economy added a better-than-expected 200,000 jobs last month. Other economic reports such as durable goods orders and construction spending also have shown growth.
As a result, traders are increasingly worried about rising inflation and a faster pace of interest rate hikes by the Federal Reserve. The U.S. 10-year Treasury yield, which moves inversely to prices, has climbed to four-year highs, while U.S. stocks have dropped. The major indexes posted their worst week in two years last week, and traded sharply lower Monday.
"This confluence of circumstances will make it difficult for the Fed to get monetary policy exactly right," Dalio said.
"Still," he said, "these big declines are just minor corrections in the scope of things, there is a lot of cash on the side to buy on the break, and what comes next will be most important."
The hedge fund manager said on Jan. 23 in an interview with CNBC that investors will see "a market blowoff" rally fueled by a flood of cash. "If you're holding cash, you're going to feel pretty stupid," he said.
Dalio founded Bridgewater Associates in 1975. The hedge fund now manages about $160 billion, according to its website.
Bridgewater also has the biggest cumulative net profit for a hedge fund firm ever, according to data from LCH Investments. From inception to 2017, Dalio's firm posted a nearly $50 billion gain for its investors, the data showed.
— CNBC's Tae Kim contributed to this report.