With the bull market charging on strong into the new year, one Wall Street vet sees investors continuing to rake in major gains. As the market benefits from the recently passed GOP tax overhaul, Bridgewater Associates founder Ray Dalio predicts a "market blow-off" rally fueled by cash from banks, corporations and investors. (See also: Tech Outperformance Won't End Soon: Goldman Sachs.)
"We are in this Goldilocks period right now. Inflation isn't a problem. Growth is good, everything is pretty good with a big jolt of stimulation coming from changes in tax laws," said Dalio in an interview with CNBC at the World Economic Forum in Davos, Switzerland. He expects the market to soon be "inundated with cash," suggesting that there is still currently "a lot of cash on the sidelines."
"If you're holding cash, you're going to feel pretty stupid," he stated.
Bull Market Will Soon Be 'Inundated With Cash'
While the investor remains confident that the market will continue on with its near-decade bull run, he does note a few risks including the Federal Reserve Bank's potential rate hikes. "You can't have a significant rise in interest rates without knocking over the whole asset markets," he explained, adding that the Fed will ultimately decide the level of real interest rates. Dalio expects asset prices to dip if the central bank lifts interest rates by 100 to 125 basis points. (See also: Expect Big Moves in These 5 Stocks.)
The Bridgewater founder isn't the only bull on Wall Street urging investors to ignore warnings of a forthcoming market correction. Also this week, Goldman Sachs' private wealth management unit told its clients to stay invested in equities "notwithstanding currently high valuations and the constant cascade of warnings that we are in an equity bubble." While the S&P 500 has been cheaper at least 90% of the time historically, analysts noted that selling stocks based on elevated valuations is typically a losing strategy. Goldman's model places the chance of a U.S. recession within the next two years at 17.6%. "When the probability of a recession is low, the likelihood of positive returns is very high," wrote Goldman.