The Fed and the promise of a vaccine arent enough to protect investors from a reckoning, top economist warns  11/29/2020 17:44:00   Shawn Langlois

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Investors had plenty to be thankful for last week, considering how the stock market behaved in the face of surging COVID-19 cases and some potentially troubling signs on the economic front.

By the time Fridays closing bell marked the end of the holiday-shortened stretch, the Dow Jones Industrial Average DJIA, +0.12% had racked up a stellar gain of 2.2% to close at 29,910.37 after having closed above 30,000 earlier in the week for the first time ever. The S&P 500 SPX, +0.24% and Nasdaq Composite COMP, +0.92% also banged out record highs.

You should worry about a reckoning longer term.

Mohamed El-Erian, president of Queens College University of Cambridge and economic adviser to Allianz, isnt so sure the bull run will last.

I can see why the market has embraced the better destination and has embraced this improvement in the journey, he told Yahoo Finance in an interview on Friday. But we still have quite a bumpy journey left. And I suspect were going to see unfortunately some companies come under a lot of pressure in the next few months.

El-Erian acknowledged that investors are taking on risk, and that there are valid reasons to support such a move, specifically the Federal Reserves clear intention of remaining a backstop for the market as well as the promise of a vaccine finally putting the end of the pandemic in view.

As long as we believe that theres a vaccine, and as long as we believe the central banks are going to minimize all the damage to the markets, not to the economy, to the markets up to that point, what you will get is people stretching for more returns, he explained.

But, he warned, theres one potential problem those two factors cant fix: bankruptcies, which he says are on the way. I tell investors, please be careful, he said. Do another granular analysis because as you stretch for more yield, you take on a lot more default and bankruptcy risk. And that is not something that central banks can save you from.

El-Erian also addressed the decoupling of the bullish run in the stock market from whats happening in the real world. The gap between Main Street and Wall Street is very, very large, and it is increasing, he said. And thats not healthy for society, and its not healthy for the markets longer term. You should worry about a reckoning longer term, especially if the economy doesnt improve quickly and validate what are very high asset crisis.

Watch the full interview

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