El-Erian: Stocks Are ‘Fairly Priced’ for 3 Major Unknowns

The S&P 500 is fairly priced given three major unknowns in the U.S. economy — the debt ceiling negotiations, what’s happening to credit availability and uncertainty over whether the Federal Reserve will hike, pause or skip raising interest rates next month — according to economist Mohamed El-Erian.

“We are fairly priced for what we don’t know, and we just need to figure out when are we going to find out, including the Fed. The Fed is going to play a very critical role here,” El-Erian, chief economic advisor for Allianz, said Tuesday on CNBC’s “Squawk Box.”

The S&P has been anchored by “all-weather names,” tech stocks in particular, that are seen as benefiting from the artificial intelligence frenzy and as able to generate revenues “almost regardless of what’s happening in the world economy,” he said. In the meantime, he added, people are waiting to see what happens.

“This is what I call an unstable equilibrium,” he said. “It’s going to go one way or the other; hopefully the S&P will go higher because these things are going to resolve to the positive side, but it is uncertain.” 

Despite the unknowns, many good things are happening in the economy, warranting the “fairly priced” view, El-Erian, also president of Queens’ College at the University of Cambridge, explained.

“The labor market remains strong, [there are] a lot of entrepreneurial activities going on, there is reason to be positive about productivity gains,” he said. “So if we can just stop shooting ourselves in the foot, there is a runway for a bumpy journey to a better destination.” 

El-Erian suggested that the U.S. risks lasting damage to its global economic dominance from political talks over raising the debt ceiling and the potential for default.

“The only people who benefit from this debt-ceiling saga are the adversaries of the United States. We are sending a very negative signal about our ability to run our economy, let alone be an anchor for the rest of the world. And the market so far has actually dealt with it very well,” he said. “I look at this market, and actually I’m very impressed by how stable it has been over the last month.”

People remember that the great financial crisis originated in the U.S., that 2017 trade tariffs violating international law originated in the U.S. and that the U.S. experienced a banking tremor a few weeks ago, El-Erian noted.

“So it’s starting to add up, and this is important because already certain countries are embarked on building little pipes around the dollar as a reserve currency, [with] China being the lead example of that. So we’ve got to be careful. We must not give the rest of the world one excuse after another to try to derisk from the U.S.,” he said.

Among the three major current unknowns that the economist cited, the uncertainty around the Fed is the most difficult to resolve, according to El-Erian, who added, “This is a Fed that has been inconsistent. It has made mistakes in its analysis, in its forecasts, in its communication, in supervision, and it’s very hard to predict.”

(Image: Wei Leng Tay/Bloomberg)