One reason why many investors have been holding stocks and bonds is because of their stability. However, according to Mohamed El-Erian, President of Queens’ College at Cambridge University and Chief Economic Advisor at Allianz SE, it may be time for a change in strategy.
“We need to get out of these distorted markets that have created a lot of damage,” El-Erian economist told CNBC.
As El-Erian points out, when corrections occur in both the stock market and the bond market at the same time, it is advisable for investors to shift their investments to “risk-off” assets.
“What we have again learned since the middle of August, is that [stocks and bonds] can both go down at the same time,” he said. “In a world like that, you have to look at short-dated fixed income, and you have to look at cash as an alternative.”
El-Erian isn’t the only one sounding the alarm about the financial markets.
Analysts at Morgan Stanley are saying that the stock market, which is already down significantly under the Biden administration, will likely be taking another massive nosedive this year.
Noted US equities bear Michael Wilson predicts that as the economy enters a recession this year, corporate profits will decline more than estimates predict, sending stocks tumbling far lower to reflect that worse-than-expected outcome.
Bloomberg reported: “Michael Wilson — long one of the most vocal bears on US stocks — said in a research note that while investors are generally pessimistic about the outlook for economic growth, corporate profit estimates are still too high and the equity risk premium is at its lowest since the run-up to 2008. That suggests the S&P 500 could fall much lower than the 3,500 to 3,600 points the market is currently estimating in the event of a mild recession, he said.”
“The consensus could be right directionally, but wrong in terms of magnitude,” Wilson said.
Others investment analysts are making similarly dismal arguments about the short-term future of US equities, as Bloomberg also reported, saying:
The strategist — ranked No. 1 in last year’s Institutional Investor survey — isn’t alone in his view that earnings expectations are too optimistic. His counterparts at Goldman Sachs Group Inc. expect pressure on profit margins, changes to US corporate tax policies and the likelihood of recession to overshadow the positive impact from China’s economic reopening.
[…]Deutsche Bank Group AG strategists led by Binky Chadha also expect US earnings to decline in 2023. Still, they said stocks could rally through the fourth-quarter reporting season, supported by a year-end selloff and low investor positioning.
President Joe Biden, for his part, has remained positive when describing economic conditions.