The world’s biggest hedge fund by assets told its clients not to bet on U.S. stocks continuing to rise without any competition and described a way to protect their investments as the “holy grail.”
“There are more investors in stocks than ever before, especially in U.S. stocks.” In a way or another, they are hoping that U.S. stocks will keep doing well, like they have for the past few decades. “However, prices are much higher than they were at the start of this bull run,” co-chief investment officer at Bridgewater Associates Karen Karniol-Tambour wrote in a new note to investors released Thursday.
“Trump wants the U.S. to win, but will U.S. stocks keep giving huge returns even though the price of those stocks already includes the U.S. winning?” Karniol-Tambour began to ask.
On Wednesday, the Dow industrials DJIA -0.39% finished above 45,000 for the first time. The S&P 500 SPX -0.09% and the Nasdaq Composite COMP -0.07% also set new highs. Wall Street is feeling good because people are still optimistic about the economy and AI technology, they think the Federal Reserve will cut interest rates, and they are excited about the new government of President-elect Donald Trump.
Karniol-Tambour says that investors shouldn’t try to guess when Wall Street’s good run will end. Instead, they should put their money into assets that will help their investments handle bad times. Some investments that have done well in the past during bad times can also help buyers find the “holy grail,” she says.
She talked about a study by Bridgewater that looked at the 10 times since 1970 when world prices dropped more than 10% and what investments did the best job of spreading risk at those times. In the table below, they showed what they found:
These drops can be broken down into two groups. The first group is made up of “growth risks,” like the dotcom bubble burst, the global financial crisis, the eurozone crisis, and the COVID pandemic in the 2000s. Bridgewater said, “Bonds were a very good way to diversify because low inflation let the Fed ease.” On the chart, those times are shown in green.
Stock drops in the 1970s, 1980s, 1990s, and 2022 are in the second group. These drops were caused by higher inflation, which made the Fed raise interest rates. During these times, bonds didn’t do well. Instead, a mix of commodities that helped track inflation was the best way to diversify. On the map, those times are shown in red.
He said that this shows that you can’t depend on a single asset during a stock downturn. What about the “holy grail”?
“Holding a mix of bonds and commodities is likely to protect you at no extra cost during the range of stock market downturns we might experience.”
