Renowned economist Arian: Avoid stocks, especially stock indices

How could demand shocks triggered by AI potentially lead to financial instability?

Source: Global Market Report

Mohamed El-Erian has issued a warning to bottom-fishers. The well-known economist and former Chief Investment Officer of Pacific Investment Management Company stated in an interview that he is currently avoiding stocks—especially broad market stock indices—because the Iran war has entered its second month. He mentioned that rising oil prices are triggering a series of economic consequences, and the market now must start to account for a risk that demand shocks could spread throughout the entire economic system.

“This is another turning point for the global economy,” he said when discussing potential demand shocks. “I have shifted from risk appetite reduction to maximum risk aversion; there are indeed some individual stocks that look attractive right now, but at this stage, I wouldn’t choose to buy into the entire index.”

Over the past month, stock prices have continued to decline, with the Dow Jones Industrial Average and Nasdaq 100 officially entering a technical correction zone on Friday.

However, despite the declines so far, he said investors are likely still misjudging the economic risks brought about by the Iran war.

“There is still a view in the stock market that this is temporary, that although it will have short-term impacts, we should ignore it,” he added.

The Iran war has already triggered a series of economic concerns in the markets, starting with recent oil price increases. Market worries center on higher crude oil prices pushing up inflation and placing a heavy burden on consumers, potentially leading them to reduce their consumption of petroleum products.

If supply does not increase, then demand must decrease to lower oil prices. But this also brings the risk of slowing economic growth, and the U.S. economy itself is already weakening, prompting more Wall Street forecasters to warn of a possible recession.

He said that demand slowdown can already be observed in other parts of the global economy. He pointed out that Asian countries, considered most vulnerable to the Strait of Hormuz blockade, are now preparing for shortages of key commodity supplies.

In the U.S., demand shocks are likely to manifest as Americans cutting back on spending, especially among low-income households. He also believes this could trigger chain reactions throughout the financial system.

“It starts with energy shocks, interest rate shocks, overall inflation shocks, and demand shocks. If this continues—hopefully it won’t—then what we’ll be talking about next is financial instability. So it’s a progressive process. Hopefully, things won’t escalate to the worst-case scenario.”

In recent weeks, he has repeatedly discussed the economic damage accumulated since the outbreak of the Iran war. In an interview in mid-March, he stated that due to the war’s impact, he believed the probability of a recession in the U.S. had risen to 35%, and the rising inflation was increasing the risk of a “financial accident.”