The financial markets want predictability – in the economy, the political system and beyond.
“The emergence of these nontraditional parties, the anti-establishment parties, adds to uncertainty,” said Mohammed El-Erian, chief economic advisor at Allianz, speaking Thursday on CNBC about Donald Trump, the movement in Britain to leave the EU and political changes in other parts of Europe.
“Markets in the U.S. haven’t priced that yet. It is a new phenomenon,” El-Erian said. “It hasn’t been priced in yet, but I think that there is an uncertainty premium that is going to come from the political side.”
While stressing that his is not a political analyst, the economist says the markets do now know what or how to interpret the rise of Trump.
“I think the hardest thing for the markets to assess — and that is why you don’t see the premium — is, how do you have a front-runner that doesn’t have the backing of his party?” asked El-Erian.
Still, he states, the U.S. economy continues to show that it can “overcome two headwinds — one, from weaker global growth, and two, from financial instability, [which] we have had recently.”
With the jobs report issued Friday, “I expect we will see a relatively robust labor report for both wages and employment creation,” he said.
This upward momentum should carry on for the near term. “For the next few months, I expect us to continue not at liftoff or escape velocity, but at a steady 2 to 2.5%. Thereafter is when we get a big question mark,” he said.
“Either we get a handoff to something much better or the U.S. will slow and that is still an open question,” the former chief executive of PIMCO said from the Global Financial Markets Forum in Abu Dhabi.
“Something has to give when it comes to the inconsistencies between the front-runner and the party,” he added, referring to the current rupture between Trump and the Republican Party.
“The message of all this – is that people are angry with many years of low growth. They are angry with greater inequality, not just income and wealth but also of opportunity. That anger – whether on the right or on left – is being expressed,” El-Erian stated.
The winner of upcoming elections in the U.S. and in Europe are “going to have to deal with this anger,” he said, noting how hard this challenge has been particularly in Greece. “How do you reconcile the anger in the street with the responsibility of governance?”
— Check out Why Are Stocks Falling in Sync With Oil Prices? on ThinkAdvisor.