- Famed economist Mohamed El-Erian warned on CNBC that the US stock market can “easily” fall by another 10% if investor attitudes shift in the coming days.
- His comments came after the Dow, S&P 500, and Nasdaq Composite suffered their biggest declines in months, driven by a massive sell-off in tech stocks on Thursday.
- “We could have another 10% fall, easily…if people start thinking fundamentals,” he said, adding that investors would be forced to consider the actual state of the economy and implication of corporate bankruptcies.
- As market fundamentals come into play, “that is the tug of war that’s going to play out, and it’s going to show the DNA of investors,” El-Erian said.
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Markets could be headed for a correction if investors switch their positions in the coming days, economist Mohamed El-Erian said on CNBC’s “Closing Bell” after US equities tanked by the most since June 11.
The economist warned that a change in mindset could be on the horizon, meaning that market participants should be on the watch.
“We could have another 10% fall, easily…if people start thinking fundamentals,” he said.
The Federal Reserve’s multi-billion dollar stimulus packages have emboldened investors to buy any dips that take place in the market, as the central bank’s financial support would theoretically help tide over the potential impact of COVID-19 on the corporate sector.
But that approach could be tested in the near-term as market fundamentals become active, El-Erian said.
“That is the tug of war that’s going to play out, and it’s going to show the DNA of investors,” he said, after the S&P 500 slid 3.5% â€” its biggest drop since early June.
The Dow closed 808 points lower, or 2.8%, at 28,292.73 on Thursday, its worst single-day loss in three months. A massive sell-off in tech stocks dragged the NasdaqComposite down 5%, its biggest decline since March.
Apple, Nvidia, and Zoom tumbled after gaining the lead at the market’s start-of-the-month rally. The iPhone maker’s shares closed down 8% on Thursday, marking its biggest one-day fall since late March.
“If the mindset changes from technicals to fundamentals then this market has further to go,” he said, “but it remains to be seen whether it will change.”
As the Nasdaq and S&P 500 posted record highs in August after five straight months of gains, El-Erian said the stock market is not only decoupled from the US economy, but also from the VIX volatility index (also known as the fear index), Treasury, and junk bond markets.
If investors choose to gauge the stock market based purely on fundamentals, they would find it hard to ignore economic uncertainty and the implication of corporate bankruptcies, he said.
“If you are in a liquidity-based paradigm, you will be dominated by relative thinking, and that’s where we’ve been. If you’re in a fundamentally-based paradigm,” El-Erian added, “the answer is: no, you are not paying for an economy that faces not just moderation in the way of improvement, but a rising level of bankruptcies.”
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