The world's biggest hedge fund has warned that global markets are entering a new era of volatility as the world adjusts to higher interest rates after a decade of ultra-loose monetary policy.
Bob Prince, co-chief investment officer at Bridgewater, said last week's market turbulence, which helped trigger record outflows from global stock funds, was set to continue.
"There had been a lot of complacency built up in markets over a long time, so we don't think this shakeout will be over in a matter of days," Mr Prince, who runs Bridgewater's $160bn of investments alongside the fund's founder Ray Dalio, said in an interview. "We'll probably have a much bigger shakeout coming."
Markets were thrown into a tailspin last week when rising bond yields triggered a sell-off in stocks that was exacerbated by the collapse of several complex volatility-linked funds and algorithmic trading strategies also tied to the level of stock market choppiness.
US equities managed to stage a late comeback on Friday, lifting the S&P 500 index to a 1.4 per cent gain and paring what at one point looked set to be the worst week for stocks since the financial crisis. Instead, the US equity benchmark managed to pare back its weekly loss to 5.2 per cent, the biggest decline since early 2016.
Mr Dalio has also become increasingly gloomy over the past year, concerned at the deepening political polarisation in Washington and a shift in central bank policy.
At the World Economic Forum in Davos last month, he said markets were still in a "goldilocks" period, but warned that the current cycle was in its final stages and would be acutely sensitive to shifts in expectations for interest rate increases.
Most analysts expect markets to recover their footing further once investors refocus on the healthy economic backdrop, but volatility remains elevated and Mr Prince, cautioned that there could more pain in the pipeline.
"Last year equity markets had a free run. But this year we are going from central banks contemplating tightening policy to actually doing it," Mr Prince said. "We will have more volatility as we are entering a new macroeconomic environment."
Brian Levine, co-head of global equities trading at Goldman Sachs, on Friday sent out an email to the investment bank's bigger clients that also warned that the market probably still has not hit its bottom.
"Historically shocks of this magnitude find their troughs in panicky selling," he said in the email, seen by the FT. "I've been amazed at how little 'capitulation selling' we've seen on the desk . . . The 'buy on the dip' mentality needs to be thoroughly punished before we find the bottom."
While last week's turmoil was primarily fuelled by the unwinding of "short-volatility" bets, Mr Prince predicted that the broader economic backdrop was setting the stage for more turbulence later this year.
The improving health of the global economy has sparked concerns that long-dormant inflationary pressures will finally emerge, forcing central banks to reduce bond-buying programmes and raise interest rates more aggressively than expected.
While Mr Prince doubted inflation would become a real problem, he expected central banks to start draining the global economy of some of the trillions of dollars they have pumped into the financial system in recent years — further challenging the post-crisis bull market.
That meshes with the view of Mr Levine at Goldman Sachs, who said that "longer term, I do believe this is a genuine regime change, one where you sell-the-rallies rather than buy-the-dips".
However, Mr Prince expects global growth will stay on track despite tighter monetary policy and more turbulent markets. "The real economy will outperform financial economy this year, the opposite of what we've seen in recent years," he said.