“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,” Dalio told CNBC.
But Dalio is also looking ahead because he sees this market running close to full capacity. On Bloomberg, he said “We are in the late stage of the cycle. That's a period of time which might go for two years or so.”
Dalio thinks people's FOMO (fear of missing out) will push them to invest and spend cash that they are holding on the sidelines. In turn this will boost stock prices and corporate earnings.
“There's a lot of cash on the sidelines. Investors have cash. Banks have cash. Consumers have cash. And they can feel like they are being left out. It feels stupid to own cash in this kind of environment. So I think that's going to be great for earnings and it's going to be great for that stimulation of growth.”
As we presented in our quarterly investment outlook call for clients, corporations are flush with cash. S&P 500 companies have held 30% of their current assets in cash since 2012. The tax cuts will only put more cash in their pockets to either spend or return to shareholders.
If there is one key risk for the stock market, Dalio points to the Federal Reserve's rate hikes. He said if the Fed increased interest rates by 100 to 125 basis points, asset prices will drop. Note that the Fed has stated they want to raise rates by 75-100 basis points this year, but the market is only pricing in 25-50 basis points.