Top American economist reveals investment strategy: has avoided stocks, especially broad-based indices!

Allianz chief economist Mohammed El-Erian warned bargain hunters, saying he has stayed away from the stock market, especially broad-market stock indexes.

El-Erian noted that the conflict between Iran and the U.S. has entered its second month, and that rising oil prices have triggered a series of economic consequences; the market now has to deal with the risk that demand shocks may spread throughout the economy.

He believes that demand shocks could be a turning point for the global economy. His risk appetite has shifted from reducing risk to fully avoiding it. Even though some stocks may look appealing right now, he won’t buy index-related products at this time.

In the past mid-March, global equities have fallen across the board, and U.S. stocks also entered a pullback last week. Last Friday, the Dow Jones Industrial Average was down 10.5% from its recent high, the Nasdaq fell 13%, and the S&P 500 had a relatively smaller decline, down 9% from its recent high.

Oversold or a bull trap

El-Erian warned that even considering the selloff so far, investors may still be underestimating the economic risks posed by the Iran war. Volatility in the stock market is temporary, and people should ignore these disruptions.

He said that contractions in demand in other areas of the global economy are already showing. In Asia—the region most affected by the closure of the Strait of Hormuz—there is currently a situation of critical shortages in key commodities. In the U.S., a demand shock may show up as Americans cutting back on spending, especially among low-income households. This could trigger ripple effects across the broader financial system.

Many on Wall Street have also emphasized that suppressing demand is a necessary way to lower oil prices unless crude oil supply increases. But this could further slow economic growth while the U.S. economy is already weak, ultimately leading to a recession.

El-Erian’s concern is that it would start with an energy shock, then a rate shock, followed by a broader inflation shock, and finally a demand shock. If this pattern continues, the U.S. would face financial instability—but that’s the whole process.

However, some analysts on Wall Street don’t agree with El-Erian’s view. Some believe U.S. stocks are already excessively oversold and expect a strong rebound. The Kobeissi Letter founder Adam Kobeissi predicts the S&P 500 is building momentum and is about to rally.

Jay Woods, Chief Market Strategist at Freedom Capital Markets, also emphasized that aside from the bear market in 2022, declines in the U.S. market are temporary, and they provide an excellent entry opportunity for both long- and short-term traders. The market’s biggest rebounds often happen below the 200-day moving average, and the timing is here.

(Source: Caixin)