PIMCO’s El-Erian Cautious on Markets, Jobs and Earnings

Too early to say U.S. is on a self-sustaining growth path, CEO says

PIMCO CEO and Co-Chief Investment Officer Mohamed El-Erian (left) spoke out on the issues facing the U.S. economy, the stock markets and earnings season early Monday on Bloomberg Television, and was generally quite cautious about where things are headed.

El-Erian was asked if Friday’s job report showing a net gain of 120,000 positions in March signaled, along with the down markets, a midyear slowdown. “No one can be certain,” the economist said. “And one data point is not a trend yet; however, context is important."

For the fourth trading day in a row, stocks dropped sharply on Monday. The Dow Jones Industrial Average lost 130 points, or 1%, to end at 12,929.59, while the S&P 500 Index declined 1.1% to 1,382.20.

“What Friday’s disappointing employment tells us,” he said, “is that it is too early to declare that the U.S. economy is self-sustaining in terms of high growth. There are too many internal and external headwinds.”

Long-term unemployment of more than 5%, 25% youth unemployment, high levels of unemployment duration and associated issues are “going to feed into political campaigning this year,” El-Erian said.

The structural problems in the labor market, he added, are coupled by structural problems in the housing, credit and infrastructure sectors. “In addition to a lack of aggregate demand, we have structural issues … and a fiscal cliff at the end of the year,” he said. “There could be up to 4% fiscal contraction if in Washington, D.C., certain things do not get worked out. This economy cannot absorb such a contraction.”

He noted that a falling unemployment rate is indicative of the fact that many people are dropping out of the labor force. “You have to look at how many jobs are being created, income and the weekly hours being worked. They are all flashing yellow at this point,” El-Erian said.

Equity Markets

The PIMCO executive pointed out that along with Friday’s jobs report, the markets are also digesting last week’s news that the Fed may not “go in for more liquidity. They are waiting for a hand off to self-sustaining growth or another round of liquidity; if we do not get the hand-offs, we will see risks to the equity markets going forward.”

The reality today, he said, is that the risks really depend on what policymakers do, “and the market has priced in a combination of self-sustaining growth and policy responses.”

In terms of corporate earnings, the year-over-year comparisons are getting harder, he says. El-Erian suggests that investors listen carefully to what companies are disclosing in terms of their outlook. “When it comes to hiring for future business, companies are hesitant,” he said.

Corporate hiring, the PIMCO executive says, is based on both confidence and “the reality of this ‘unusually uncertain outlook,’ [Ben] Bernanke’s’ term, with lots of moving pieces,” such as high oil and other input prices, as well as uncertainty in Europe.

When asked about his views versus those of the Fed chief, who is more pessimistic than optimistic on the economy at present, El-Erian said, “Certainly that is how people are positioned … and there are genuine uncertainties.”

While stating that his outlook is cautious, he urged investors to focus on companies that are “high up in the capital structure,” with strong balance sheets, cash generation and exposure to growth. “We will have more of these [buying] opportunities,” he stressed.

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