Two opposing views by Wall Street gurus will only add to investors' angst as the market ends the week deep in the red.
The S&P/ASX 200 Index (ASX: XJO) lost 1.4% to 6,747 on Friday and is down around 3% for the past week.
The weakness won't surprise many as history has shown September and October to be among the worst times of the year for global share markets.
What is the market's next move?
But those debating whether to buy the dip for the much anticipated Christmas rally will be torn by conflicting forecasts from Cathie Wood and Ray Dalio.
Wood is the founder of Ark Investment Management and was named top stock picker of 2020 by Bloomberg. Dalio is a billionaire investor and founder of the world's largest hedge fund, Bridgewater Associates.
Wood is using the market weakness to snap up shares while Dalio is warning of another sharp drop for equities.
Inflation outlook will decide market direction
Their opposite views can be essentially boiled down to inflation expectations. Ark Investment bought 27 shares on Tuesday amid the sharpest sell-off on the NASDAQ-100 (NASDAQ: NDX) since March 2020, reported Bloomberg.
Wood is playing chicken with the US Federal Reserve. The Fed unleashed the market volatility by aggressively hiking interest rates to control runaway inflation.
The buying spree is likely related to Wood's prediction that high inflation will soon turn into deflation.
As inflation is bad for share valuations, deflation will arguably have the opposite effect. This is particularly so for tech shares, which have borne the brunt of the market sell-off.
Warnings of a new bear market
But not many would share her view on deflation. If anything, Ray Dalio reckons the market is underestimating the inflation problem.
In a tweet to his 234k followers, Dalio said:
Right now, the markets are discounting inflation over the next 10 years of 2.6 percent in the US. My guesstimate is that it will be around 4.5 percent to 5 percent long term, barring shocks (e.g., worsening economic wars in Europe and Asia, or more droughts and floods) and significantly higher with shocks.
He is also predicting that rates will have to rise to around 4.5% too and that will trigger a 20% drop in share prices. A peak-to-through fall of 20% or more would officially put shares in a bear market.
However, Dalio stressed that these are only "guesstimates". Who can blame him when central banks have gotten their inflation forecasts so wrong?
Perhaps the more important lesson from history is not to try to pick market bottoms. Over the longer-term, persistent investors have made good returns from buying quality shares – regardless of the market cycle.