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

Allianz chief economist Mohamed El-Erian warned bargain hunters, saying he has avoided the stock market—especially broad-based stock index funds.

El-Erian said that as the conflict between Iran and the Middle East enters its second month, rising oil prices have triggered a chain of economic consequences, and the market now has to confront the risk that a demand shock could spread throughout the economy.

He believes a demand shock could be a turning point for the global economy. His risk appetite has shifted from lowering risk to outright avoiding it. Even though some stocks currently look attractive, he will not buy index-related products at this time.

In the first half of March, global equities largely declined, and the U.S. market also entered a pullback last week. Last Friday, the Dow Jones fell 10.5% from its recent high, the Nasdaq dropped 13%, and the S&P 500 saw a smaller relative decline, down 9% from its recent peak.

Oversold or a bear-market rally?

El-Erian warned that even considering the current selloff, investors may still be underestimating the economic risks posed by the Iran war. Stock market volatility is temporary, and people should ignore these disturbances.

He said signs of demand contraction in other parts of the global economy are already emerging. Asia, which has been hit hardest by the closure of the Strait of Hormuz, is now facing a critical shortage of key commodities. In the United States, the demand shock could show up as Americans cutting spending, especially in low-income households. This could trigger ripple effects across the broader financial system.

Many on Wall Street also emphasized that restraining demand is a necessary way to lower oil prices unless crude oil supply increases. But this could further slow economic growth in the U.S., where the economy is already weak, and in turn lead to an economic recession.

El-Erian’s concern is that first comes an energy shock, then an interest-rate shock, followed by a broader inflation shock, and finally a demand shock. If this continues, the U.S. will face financial instability—but that is how the entire process plays out.

However, some analysts on Wall Street do not agree with El-Erian’s view. Some believe U.S. stocks are already excessively oversold and expect a strong rebound in the stock market. Adam Kobeissi, founder of The Kobeissi Letter, predicted that the S&P 500 is building momentum and is about to bounce back.

Jay Woods, Chief Market Strategist at Freedom Capital Markets, also stressed that aside from the bear market in 2022, declines in the U.S. market have been temporary and have created an excellent entry opportunity for both long- and short-term traders. The market’s biggest rebound often happens below the 200-day moving average—and the timing is now right.

(Source: Caixin Global)