Be ready for stocks to stumble and recession to strike, Bridgewater's co-chief investor says

• Don't be surprised if stocks tumble and a recession takes hold, Greg Jensen says.
• Bridgewater's co-chief investor says markets aren't pricing in inflation and growth risks.
• Huge amounts of government spending have dulled the impact of interest-rate hikes, Jensen says.

Many investors are betting that inflation will fade, the Federal Reserve will slash interest rates, the US economy won't skip a beat, and stocks will keep marching upward. They shouldn't rule out a recession and a slump in asset prices, Greg Jensen has warned.

"My view is you end up with growth disappointing a bit and inflation disappointing on the high side a bit, ending up probably bad for bonds and probably a little bit bad for equities and generally weak growth," the co-chief investment officer of Bridgewater Associates predicted during the latest episode of Bloomberg's "Odd Lots" podcast.

"And if that weak growth starts to translate into a rising savings rate, you could easily end up [going] into a recession and one that's going to be difficult to deal with," he added.

In response to inflation hitting a 40-year high last year, the Fed has hiked interest rates from almost zero to north of 5%. Higher rates typically spur consumers to save instead of spend, eroding demand for companies' goods and services. Employers react by laying off workers, which raises unemployment and reduces spending further, cooling the economy and relieving upward pressure on prices.

However, a tidal wave of government spending since the COVID-19 pandemic struck in early 2020 has watered down the impact of the Fed's hikes, Jensen said. There's so much money sloshing around the economy that consumers haven't ramped up their saving as much as expected, and businesses haven't pared their spending and investing much either, he continued.

Higher rates should eventually take their usual toll, potentially causing a recession and likely weighing on asset prices, Jensen said. Yet the S&P 500 has gained 16% and the tech-heavy Nasdaq Composite has soared 32% this year, signaling investors aren't worried about a slowdown.

"The Fed seems a little bit more realistic than the markets do on what it's going to take," he said about squashing inflation. "To get an equity rally from here, you have to have lower rates fairly quickly into a world where earnings are pretty good."

Jensen also predicted inflation would trend above the Fed's 2% target going forward, limiting the central bank's ability to cut rates when growth and employment are under pressure. However, the early backer of ChatGPT-creator OpenAI acknowledged that machine-learning tools could supercharge productivity and ease inflationary pressures.

The veteran investor has previously sounded the alarm on stocks and the economy. In September, he warned the US was at the center of a global financial bubble, a severe recession was looming, and asset prices could plunge by up to 25% and might not return to pre-pandemic levels against a backdrop of stubborn inflation and higher rates.

Bridgewater, the world's largest hedge fund, was founded by Ray Dalio. The billionaire investor and "Principles" author resigned as co-CIO in 2021.