The big headline this week for market players was from the chief of the biggest hedge fund in the world, Ray Dalio of Bridgewater, which has AUM (assets under management) north of $150 billion. From Reuters...
Head of world's largest hedge fund says U.S. in a 'pre-bubble phase' with a 70% chance of recession
"I think we are in a pre-bubble stage that could go into a bubble stage," the hedge-fund manager said during a Harvard Kennedy School's Institute of Politics on Wednesday.
Okay, that sounds pretty good for stock investors who know how to play the game. As I've said for years, we ain't near "euphoria" nor "irrational exuberance" yet, so buying the dip in strong growth companies is still the game plan.
But then he throws in the "70% chance of recession" analysis in the same breath?
What Dalio actually said was that he is estimating the probability of a recession by the 2020 presidential election at 70%.
He is also quoted as saying recently "the risks of a recession in the next 18-24 months are rising."
Okay, that also makes more sense. A lot can happen in 2 years. Inflation could spike, sending interest rates higher and inverting the yield curve, one of the classic harbingers of economic recession.
Any reasonable economist or investment asset manager could be modeling a 50% probability of recession in the next 18 months as a "look-out" for unknown unknowns, i.e., "black swans."
Feeling Stupid, or Savvy?
But Dalio is also the same guy who last month told global investors at Davos that "if you're holding cash, you're going to feel pretty stupid" as the stock market was due to rocket to fresh heights.
The next week, the "flash correction" began. I decided I would feel stupid if I didn't have cash for that dip. So we sold some stuff near the highs and bought the lows aggressively. That story here with lots of stock charts.
So what do we do with these big warnings from a hugely successful asset manager?
I believe you need to stay focused on the fundamentals which argue for continued fund flows into equities over the next 18 months.
On October 9, I wrote a special report for Zacks Confidential titled The Monetary Myth of Gold. Here was a good summary of my "better than gold" investment thesis...
If you follow my portfolios, media appearances, or other investment commentary, you know the primary macro themes that have made me stay aggressively long growth and technology stocks this year.
In case you've lost track, I will list a few of them that are extremely relevant...
1) Global economic momentum, however slow & steady it appears
2) Interest rates on our side, as investors in any asset class
3) Technological innovation unleashed in so many industries that the exponential results are staggering
4) Consumer/worker adaptations to rapid change and innovation are astoundingly positive for corps
5) While automation threatens the need for that dastardly concept of Universal Basic Income, tech/science entrepreneurs across the planet continue to create and build wealth for more people around the globe
(end of Zacks Confidential excerpt)
In that report, after giving a detailed explanation -- including inflation, interest rate, and US dollar dynamics -- of why gold was not a favorable choice for our investment capital, I picked 3 growth stocks for Zacks members from Retail, Technology, and Healthcare that I believed would outperform gold over the next 12-18 months.
They were Alibaba (BABA - Free Report) , NVIDIA (NVDA - Free Report) , and Edwards Lifesciences (EW - Free Report) . Let's see how they have done...
After making new all-time highs above $200, Alibaba has fallen back in line with gold and the S&P 500.
Meanwhile NVDA and EW are stealing the show, as strong growth franchises like to do.
And I'm sticking with all 3 names this year. But I have a boatload more ideas that I either own or I'm tracking every week.
For instance, if you believe that this Technology Super Cycle has more room to run, then you'd be a buyer of Lam Research (LRCX).
And if you like picking Biotech ponies, you might have joined me in our recent 155% gain in Sangamo Therapeutics (SGMO - Free Report) . Meanwhile we still own bluebird bio (BLUE - Free Report) from $95 and a handful of other promising Healthcare Innovators.
Bottom line: Let's say Dalio is only half right about all his bold predictions. That means we can bank on stocks continuing to "bubble up" over the next year and we need only keep a vigilant eye on the inflation/rates picture and economic data for early signs of trouble (of which I see few now).
With this strategy, I don't plan on feeling stupid any time this year.
Disclosure: I own shares of BABA, NVDA, and LRCX for the Zacks TAZR Trader portfolio. I own shares of EW and BLUE for the Zacks Healthcare Innovators portfolio.
Kevin Cook is a Senior Stock Strategist for Zacks Investment Research where he runs the TAZR Trader and Healthcare Innovators services. Click Follow Author above to receive his latest stock research and macro analysis.