- A wave of corporate insolvencies has the best chance at dragging stocks from their lofty prices, Mohamed El-Erian, chief economic advisor at Allianz, said Monday.
- Investors have looked through US-China tensions, stretched valuations, stimulus delays, and surging COVID cases in recent weeks to push stocks higher.
- “You have a very strong technical supporting this marketplace,” El-Erian told CNBC, but large-scale bankruptcies could derail the rally.
- Even the Federal Reserve’s bond-buying and liquidity boosts can’t keep a slew of defaults from prompting unemployment and capital market damage, he added.
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Corporate bankruptcies – more than any other factor – stand to halt the stock market’s steady run higher, Mohamed El-Erian, chief economic advisor at Allianz, said on Monday.
Experts are beginning to wonder what, if anything, can topple the stock market’s extraordinary run-up. Investors have seen through oil-market chaos, spiking virus infection rates, US-China tensions, and stimulus delays, and major indexes currently sit just below record highs.
Yet many companies still face major insolvency risks, and a chain reaction of corporate defaults could revive a bearish slump, the famed economist said.
“I think what derails this market isn’t more China-US tension, isn’t more political differences. It would be if we get then large-scale bankruptcies,” El-Erian said on CNBC. “That is what derails this market. Otherwise, you have a very strong technical supporting this marketplace.”
Bankruptcies have largely been avoided despite the current downturn serving as the deepest and quickest recession in nearly a century. Though some large retailers have defaulted on their debt, the Federal Reserve’s move into bond-buying boosted credit market health and drove an influx of investors to corporate debt offerings. Beleaguered sectors were able to tap public debt markets for critical aid before the central bank bought a single bond.
However, stalled talks on a second round of fiscal stimulus and fears of a prolonged downturn are once more weighing on firms’ outlooks. If companies can’t continue to easily sell debt for cash, the recession could slide into a new phase and drag the stock market with it, El-Erian said.
“If you get that, then unemployment gets more problematic and you get capital impairment,” he said. “Believe me, if there’s one thing that Federal Reserve money cannot help markets through, it’s capital impairment events.”
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