'I stress, this is different': Top economist Mohamed El-Erian lays out 3 reasons investors should think twice before buying the dip in stocks

REUTERS/Mario AnzuoniMohamed El-Erian, Chief Economic Advisor of Allianz, takes part in a panel during the Milken Institute Global Conference in Beverly Hills, California April 27, 2015.
  • New coronavirus deaths in Iran, Italy, and South Korea drove US stocks lower on Monday, but top economist Mohamed El-Erian recommends investors avoid buying the dip.
  • Uncertainty around the outbreak’s containment, its long-term effects on China’s development, and the lasting disparity between asset prices and fundamentals will drag on US stocks for longer than more conventional downturns, the economist said on CNBC Tuesday morning.
  • Even though “the path of least resistance for this market is to bounce up,” the epidemic’s unpredictable nature will likely buck that trend, El-Erian added.
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A spike in new coronavirus deaths outside of China saw US stocks fall the most in two years on Monday, but famed economist Mohamed El-Erian is urging investors to avoid buying the dip.

The buy-low scheme has benefited investors for more than a decade as the US market pushes further into its record-long bull run. Key uncertainties related to the coronavirus outbreak should keep investors from repeating the conventional strategy, El-Erian said Tuesday morning on CNBC.

Short-term concerns surrounding the containment of the virus and the speed at which economies recover will cripple markets for weeks to come, the Allianz chief economic officer said. Following the outbreak’s immediate fallout, analysts will look to quantify its damage to China’s development process. The slowdown in economic growth could even invigorate deglobalization, as companies with complex supply chains look to insulate themselves from a similar catastrophe, El-Erian added.

The final factors to consider are “a whole host of uncertainties related to initial conditions” in global markets, the economist said. The global economy “wasn’t in a great place to begin with,” and lasting discrepancies between asset valuations and fundamentals may require correction before markets can resume their upward trend, according to El-Erian.

Investors are used to seeing quick rebounds after falls as precipitous as Monday’s, but the sheer unpredictability around the coronavirus outbreak poses serious risk to those betting on stocks, El-Erian added.

“I understand that the path of least resistance for this market is to bounce up, because that’s what it’s been conditioned to do,” the economist told CNBC. “But I stress, this is different.”

The economist flagged the virus as a significant threat earlier in February, warning the outbreak would “paralyse China” before tearing into global economic growth. Since then, numerous economists have lowered their expectations for global growth as coronavirus’ death toll climbed. A spike in virus-related deaths in Italy prompted new doubts that the outbreak could be effectively contained in China.

El-Erian compared the outbreak’s effect on markets to more conventional downward pressures such as weak earnings reports and slowed economic growth. The “shock” and lack of precedent tied to the virus will lead its economic fallout to linger longer compared to more common market snags, the economist said.

“We’re going to have a lot of risk-aversion on the part of the economic actors. It’s going to take time,” El-Erian said. “Economic sudden stops are hard to restart.”

Coronavirus is responsible for more than 2,700 deaths and has infected more than 80,000 people as of Tuesday morning. The World Health Organisation has stopped short of calling the virus a pandemic, but rising death tolls outside of China could prompt such reclassification.

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