After hotter-than-expected inflation scared investors on Tuesday, the Dow Jones Industrial Average fell over 1,200 points, marking the stock market’s worst since June 2020.
On the same day, Stanley Druckenmiller, one of Wall Street’s most respected figures, argued that the pain will not be temporary — and that stocks will trade sideways for a full decade as the global economy undergoes a tectonic shift.
“In my opinion, the market will at best be stagnant for 10 years, something like this period from 1966 to 1982,” he said in an interview with Alex Karp, CEO of software and AI firm Palantir.
Druckenmiller added that with inflation raging, central banks raising interest rates, increasing deglobalization and the protracted war in Ukraine, he believes the likelihood of a global recession is now higher than it has been in decades.
And given Druckenmiller’s track record, investors would be wise to heed his warnings.
The legendary investor founded his hedge fund, Duquesne Capital, in 1981 and routinely outperformed the majority of his Wall Street peers for decades to come, posting an annualized average return of 30% from 1986 to 2010, according to Yahoo Finance.
But Druckenmiller really made his mark when he spearheaded George Soros’ bet against the British pound in 1992, helping the billionaire rake in a whopping $1.5 billion in profit in a single month.
Druckenmiller eventually closed his hedge fund in 2010 and turned it into a family office — a type of private company set up by wealthy families to manage their money — as many hedge funds typically do when they unofficially retire. But the leading investor’s views are still widely followed on Wall Street.
Druckenmiller’s argument for why the stock market is in for a decade of “flat” trading is based on the idea that central bank policy around the world is shifting from a supportive to a hawkish stance.
This shift is the result of the globalization that has characterized the past few decades, which is fading amid the war in Ukraine and tensions between the US and China. Druckenmiller points out that globalization has a deflationary effect because it increases worker productivity and accelerates technological progress, but that’s over now.
“When I look back at the bull market that we’ve had in financial assets since 1982… all the factors that led to it not only stopped, they reversed,” he said, citing recent de-globalization trends like the US divide and China, along with a trend toward higher government spending and regulation since the 1980s.
Druckenmiller went on to explain how central banks responded to the disinflation caused by globalization since the 1980s – and especially after the great financial crisis of 2008 – with unsustainable policies that now need to be revised.
“The post-global financial crisis response to disinflation was zero interest rates, lots of money printing and quantitative easing. That created an asset bubble in everything,” he said.
Central bank officials around the world are now moving away from near-zero interest rates and quantitative easing — a policy of buying mortgage-backed securities and government bonds in hopes of stimulating lending and investment — which have bolstered financial assets over the past few decades.
“They’re like reformed smokers,” Druckenmiller said. “You’ve gone from printing a bunch of money, like driving a Porsche at 200 miles an hour, to not just taking your foot off the gas, but just slamming on the brakes.”
In his view, the US Federal Reserve has raised interest rates four times this year to fight inflation and is not the only central bank trying to lower consumer prices with tighter monetary policy. From the UK to Australia, central bankers around the world are shifting to a more conservative approach and raising interest rates.
While this means that financial assets, including stocks, are likely to underperform over the next decade, Druckermiller believes, there is some positive news.
“The nice thing is that there were companies back then that did very, very well in this environment,” said Druckenmiller, referring to flat trading in the stock markets between 1966 and 1982. “That was when Apple Computer was founded, Home Depot was founded .”
Druckenmiller also gave investors a caveat about his pessimistic outlook, saying that this is the most difficult time in history to make economic forecasts and that he has a “bearish bias” in the past that he needs to avoid completely in his career.
“I like darkness,” he said.
Sign up for the wealth Includes an email list so you don’t miss our biggest features, exclusive interviews and investigations.