1000-Point Swings ‘New Reality’ for Dow Jones Index: Allianz Economist El-Erian

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December 31, 2018

Mohamed El-Erian — the chief economic adviser at Allianz SE — says concerns over a US recession are overblown, but we can expect wild fluctuations on the Dow Jones Industrial Average in 2019 because of financial uncertainty in Europe and China.

However, El-Erian said the US economy will remain strong and will continue to grow at a robust rate of 2.5% to 3%, while wages will continue to rise 3% or more.

“Don’t be surprised if you see these 1,000-point swings in the Dow Jones,” El-Erian told Fox News Sunday on Dec. 30 (video below). “That is our new reality for a while.”

It reflects that we’re coming from a very good 2017. People forget that. Everything went right in 2017: Higher returns, no volatility.

So I think of this as a normalization. It doesn’t feel good in the short-term, but it’s OK over the long-term.

‘Recession Not Becoming Reality’

El-Erian said despite the media narrative that the hyper-partisan political divide in Washington, DC is hurting the US economy, that’s not true.

“You have to look beyond Washington,” he said. “There are three things going on:

  1. The global economy has become more uncertain — not because of the US, because the US is doing fine — but because of Europe and China.
  2. Central banks have changed behavior. They are no longer buying securities. They are no longer keeping interest rates really low. The Fed and the European Central Bank are tightening liquidity.
  3. Behavior has changed on Wall Street. It’s no longer about buying every dip; it’s about selling every rally.”

El-Erian said there are several different factors contributing to the current market volatility, which is being amplified by computer trading.

“So it’s really important to get the focus back on what’s working, and that’s the US economy,” he said.

[A recession is] certainly not becoming a reality. You’d need either a major policy mistake or a massive market accident to push us into recession.

However, El-Erian said the US economy will slow down unless it builds on the pro-growth policies of President Trump.

‘The Fed Needs to Communicate Better’

When asked if Trump’s criticisms of the Federal Reserve are unwarranted, El-Erian said not really. “It’s certainly unusual, but even the Fed is understanding that it needs to communicate better,” he said.

El-Erian said the Federal Reserve must do a better job to show Americans that it’s sensitive to the impact that its frequent rate hikes have on the stock market and the US economy.

The Fed has to realize that it cannot keep a really important policy tool on autopilot — that it needs to be more sensitive to what’s happening [in the real world].”

As CCN reported, Federal Reserve chairman Jerome Powell recently raised interest rates for the fourth time in 2018.

The move promptly caused the Dow Jones to tank by sparking a massive sell-off in the stock market and fueled concerns over a possible recession.

It also caused a social-media backlash, with prominent political voices like former US Congressman Ron Paul calling to abolish the Fed.

“The president has a point in saying, ‘Fed, get a feel for what’s going on beyond the strict, narrow domestic economy,'” El-Erian said.

However, El-Erian said the Fed should maintain its independence. “Central bank independence is very important for economic stability, and economic stability is key to economic growth,” he said.

El-Erian: Crypto Will Survive Bear Market

And what does Mohamed El-Erian think about the current crypto bear market?

In November 2018, he said he believes cryptocurrencies will definitely survive the downturn and be more widely adopted, but they won’t replace fiat money anytime soon.

We are seeing a rotation going on — retail is becoming more reasonable.

The exuberance is behind us, and institutions are starting to establish a foothold. And that’s good long-term.

Featured image from Shutterstock.

Last modified (UTC): December 30, 2018 21:02

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