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

Allianz chief economist Mohamed El-Erian issued a warning to bargain hunters, saying he has stayed away from the stock market—especially broad-based stock indexes.

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

He believes that a demand shock could be a turning point for the global economy. Now his risk appetite has shifted from lowering risk to completely avoiding risk. Even though some stocks may look appealing, he will not buy index-related products at this time.

In the first half of March, global stock markets fell across the board, and U.S. stocks also entered a pullback last week. Last Friday, the Dow Jones Index was down 10.5% from the recent high, the Nasdaq Index fell 13%, and the S&P 500 Index saw a relatively smaller decline, down 9% from its recent high.

Oversold or a trap for buyers

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

He said that demand weakness in other areas of the global economy is already showing. The region most affected by the closure of the Strait of Hormuz—Asia—is now facing a critical shortage of key commodity supply. In the United States, the demand shock may show up as Americans cutting back on spending, especially among low-income households. This could trigger knock-on 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 oil supply increases. But this could further slow economic growth in the U.S., which is already struggling, and in turn lead to an economic downturn.

El-Erian is concerned about the sequence: first an energy shock, then an interest-rate shock, followed by a broader inflation shock, and finally a demand shock. If this keeps going, the U.S. will face financial instability—but that is the whole process.

However, some Wall Street analysts do not agree with El-Erian’s view. Some believe U.S. stocks are already too 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 up momentum and is set to bounce.

Jay Woods, chief market strategist at Freedom Capital Markets, also stressed that apart from the bear market of 2022, declines in the U.S. market have been temporary, providing an excellent entry opportunity for both long- and short-term traders. The biggest rebounds in the market often happen below the 200-day moving average, and the time has come.

(Source: Caixin Global)