'Bubble stocks have burst,' but it's still not safe to buy them, says Ray Dalio, founder of the world's largest hedge fund

‘Bubble stocks have burst,’ but it’s still not safe to buy them, says Ray Dalio, founder of the world’s largest hedge fund

A bubble has burst for emerging tech stocks, but that doesn’t mean it’s safe or smart to go long on these names right now, billionaire investor Ray Dalio has warned.

Dalio, founder and co-chief investment officer of Bridgewater Associates, the world’s largest hedge fund, warned in January that emerging tech companies, including set-top box maker Roku Inc. ROKU,
+0.80%
and electric vehicle maker Tesla Inc. TSLA,
+0.70%,
were “clearly in an extreme bubble”.

At the time, the entire US stock market was on the “edge” of a bubble, in other words, 70% of the way to the highest bubble, which occurred at the end of the 1990s. 1990s and into the late 1920s, Dalio noted in a LinkedIn post on Monday. . At the same time, Dalio highlighted other signs of scum, including the boom in special acquisition companies, or SPACs, the boom in initial public offerings and a strong recovery in options activity, which have all of which were funded by the unprecedented flood of post-COVID liquidity that had found its way into asset markets.

“Since then, those bubble stocks have burst. They’ve fallen by about a third over the past year – while the S&P 500 SPX,
+0.48%
is roughly flat,” Dalio wrote.

That doesn’t mean all is well. Emerging tech stocks “no longer appear to be in a bubble, but they also don’t appear to have tipped significantly to the opposite extreme, so it’s not necessarily true that now is a good time to buy them,” a- he writes.

“Bubbles can take a long time to unwind (two years in the case of the 1929 bubble, a year in the case of the late 90s tech bubble) and usually go to the opposite extreme, so just because they’re not at an extreme bubble doesn’t mean they’re safe or it’s a good time to go long,” he said, warning that US stocks as a whole still look overvalued.

The charts below show that while the unwinding of the current bubble echoes the patterns seen in the 1920s and 1990s, there is still substantial downside risk.

Principled perspectives

“History shows that once the burst begins, bubbles more often correct lower than settle at more ‘normal’ prices,” Dalio wrote.

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