Why El-Erian Would 'Wait and See' on Stocks
While the stock market is “comforting,” the bond market is sending “conflicting signals,” he said.
Economist Mohamed El-Erian considers the stock market fairly valued but wouldn’t go all in now given significant uncertainties in the economy, he suggested on CNBC’s “Squawk Box” on Monday.
“The bond market recognizes and has embraced that there’s a lot of uncertainty and that you’ve got to factor that in. The equity market is talking less uncertainty and I just worry that you don’t want to commit fully to this equity market until you figure out the things that we don’t know,” the chief economic advisor for Allianz said. “I don’t know how they’re going to play out.”
It’s unclear how sticky inflation is and how the Federal Reserve will balance the “trilemma” of reducing inflation, minimizing damage to jobs and maintaining financial stability, El-Erian said.
“It’s unusually uncertain, I want to stress that, that’s why the market is fair here. Given what we know and we don’t know, these levels seem fair,” he said.
“I wouldn’t bet against these markets, I wouldn’t bet in favor of these markets, I would actually just wait and see,” said El-Erian, who is also the Queens’ College president at Cambridge University. “We’re going to have to figure out these three main issues.”
El-Erian said he’s trying to figure out three things in first-quarter earnings reports this week:
- How advanced tech sector cost-cutting is and how impactful it will be.
- He cited Coca-Cola’s “fascinating” earnings win Monday, saying: “It shows you that pricing power really matters, especially when you have a strong brand and a big market share.”
- Insight into the banking crisis. “That’s a really important one to look at,” he said.
Overall, “it’s a very varied picture but one that reflects the uncertainty that’s out there,” the economist said.
El-Erian said he was interested in whether banks have stabilized deposits and what’s happening to funding costs and loan loss provisions.
“This thing is going to play out over many quarters, it’s not going to play out immediately. And all that matters because we need to get a feel for how much credit extension is going to come down,” which is going to be a big question for the market, he said.
There’s a negative bias built into stocks when looking at the equity market on a stand-alone basis, El-Erian said, agreeing with a CNBC host who noted stocks lately have fallen less than usual when companies miss earnings expectations and climb more than usual when they beat expectations.
The bond market, however, is sending signals indicating uncertainty in both the economy and Fed policy, including whether the central bank will lower interest rates this year or raise them further, he said.
“It is the bond market that is confusing right now. We are seeing things that we have not seen ever or for a long time,” El-Erian said, noting “astronomical levels” in the spread between 1-month and 3-month Treasury bills and, for the first time in a decade, spreads over 50 basis points for 5-year U.S. sovereign credit default swaps.
“So the equity market actually is calming, is comforting,” he said. “It is the bond market that’s sending all these conflicting signals. I myself can’t make what to think of what’s going on in these parts of the bond market that we’re not used to (looking) at.”
(Image: Wei Leng Tay/Bloomberg)