• Bridgewater Associates founder Ray Dalio said on Wednesday that stocks are likely to fall further.
  • Dalio made the comments at MarketWatch’s Best New Ideas in Money Festival.
  • He shared two tips for navigating the current environment.

Ray Dalio says the pain that stocks have faced this year likely isn’t over yet. 

As the Federal Reserve continues to raise interest rates — they raised rates by 75 basis points for their third meeting in a row on Wednesday — investors can continue to expect increased competition for stocks in the form of higher yields, and damage to corporate earnings, the Bridgewater Associates founder said on Wednesday morning.

"I do believe that as you raise the interest rate to what's appropriate, that competitiveness is going to drive it down, and then also, it will hurt earnings, it will hurt the economy," Dalio said at MarketWatch's Best New Ideas in Money Festival in midtown Manhattan.

Dalio said he believes the Fed will raise the fed funds rate to between 4-5%, that the US economy will worsen in 2023 into a stagflationary environment, and that the S&P 500 will pay the price by falling around another 20%, reiterating a call he's made in recent days.

Year-to-date, the S&P 500 is down 19%. The fed funds rate ceiling currently sits at 2.5%, and is likely to rise to 3.25% after Wednesday's FOMC meeting concludes.

Given his down outlook, Dalio was asked how investors should approach the current environment, and gave two answers.

The first is to invest in inflation-indexed bonds as opposed to nominal bonds. The former shields investors from rising or falling inflation rates, while nominal bonds can lose money when considering inflation. For example, a 2-year Treasury note yields 4% — a healthy yield but still below the 8.3% year-over-year rise in consumer prices seen in August.

"Start to look at the return of your assets, including cash, in real dollars, so that you think about buying power," Dalio said. "And then think about the types of assets — for example, and inflation-indexed bond is probably better than a nominal one."

The Vanguard Short-Term Inflation-Protected Securities ETF (VTIP) offers exposure to inflation-indexed bonds. 

Dalio also recommended that investors keep their portfolios well-balanced and diversified, and avoid timing the market.

"The most important thing that you can do is have a well-balanced portfolio, not to market time, but diversify," Dalio said. "I would not encourage market timing. Ride through these things."

Longer-term, Dalio said he remains bullish on China, and said asset prices there are low. 

Some examples of Chinese stocks in Bridgewater's holdings include Tencent Music Entertainment Group (TME) and Baidu (BIDU).

The SPDR S&P China ETF (GXC) offers broad exposure to Chinese equities.

Dalio, whose hedge fund is the largest in the world with $150 billion in assets under management, isn't the only investing titan to to say US stocks still have substantial downside.

Guggenheim Investments CIO Scott Minerd said in a tweet in recent weeks that stocks should fall another 20% given how high valuations are amid high inflation. 

Jeremy Grantham, the founder of GMO who called the dot-com bubble, also said in an August 31 commentary that "every historical parallel suggests that the worst is yet to come," and said that three other times in the last 100 years that stocks were as extended as they currently are, the market has fallen 50% or more.

Some Wall Street strategists — including those at Bank of America, Goldman Sachs, and Morgan Stanley — have said they see roughly 20% further downside for the S&P 500 if a recession unfolds.