Don't Read Too Much Into Stocks' Sudden Rebound

Mohamed El-Erian profile picture
Mohamed El-Erian
6.52K Followers

Summary

  • In a little more than a month, U.S. stocks have gone from a record high to the fastest correction in history to the best week since 1938.
  • Driving these moves to a great extent were the contrasting investor sentiments of complacency at first and then panic.
  • If you can correctly characterize the week's strong rally, you hold the key to what lies ahead.

It's hard to believe, but in just more than a month, U.S. stocks, as measured by the Dow Jones Industrial Average, a widely followed albeit partial and imperfect proxy, have gone from a record high to the fastest correction in history to the best week since 1938. Driving these moves to a great extent were the contrasting investor sentiments of complacency at first and then panic. If you can correctly characterize the week's strong rally, you hold the key to what lies ahead.

The Dow hit its record on Feb. 12 despite mounting evidence that the coronavirus was already damaging the global economy. China's economy, the world's second largest, had been brought to a virtual standstill. Global supply lines had been disrupted, causing some factories elsewhere to close. International trade was falling. And the source of all this, the highly contagious Covid-19 virus, was already spreading to other countries.

Some of us had been warning for weeks about the threat of the coronavirus because it inflicted "cascading economic sudden stops", which are common in fragile and failing states but not in systemically important economies. They are highly disruptive because they destroy both demand and supply at the same time. As such, this was an urgent and complex policy priority that did not provide a "buy-the-dip" opportunity for investors.

These warnings fell largely on deaf ears, and for understandable reasons. The sudden stop dynamics, while extremely consequential, were largely unfamiliar to the vast majority of economists and policy makers. Similarly for Wall Street analysts, investors and traders who - conditioned by years of ample and predictable liquidity provided by central banks and amplified by the "fear of missing out"- had developed an almost automatic response to buy any market pullback regardless of the cause.

This combination had evolved into a seemingly

This article was written by

Mohamed El-Erian profile picture
6.52K Followers
Dr. El-Erian is Chief Economic Advisor at Allianz and member of its International Executive Committee. He chairs President Obama's Global Development Council, is a Financial Times Contributing Editor, a Bloomberg View columnist and author of the NYT/WSJ best seller "When Markets Collide." Dr. El-Erian formerly served as CEO and co-CIO of PIMCO, the global investment management company. He re-joined PIMCO at the end of 2007 after serving for two years as president and CEO of Harvard Management Company, the entity that manages Harvard’s endowment and related accounts. Dr. El-Erian also served as a member of the faculty of Harvard Business School. He first joined PIMCO in 1999 and was a senior member of PIMCO's portfolio management and investment strategy group. Before coming to PIMCO, Dr. El-Erian was a managing director at Salomon Smith Barney/Citigroup in London and before that, he spent 15 years at the International Monetary Fund in Washington, D.C. Dr. El-Erian has published widely on international economic and finance topics. His book, "When Markets Collide," won the Financial Times/Goldman Sachs 2008 Business Book of the Year and was named a book of the year by The Economist and one of the best business books of all time by the Independent (UK). He was named to Foreign Policy’s list of “Top 100 Global Thinkers” for 2009, 2010, 2011 and 2012. Dr. El-Erian has served on several boards and committees, including the U.S. Treasury Borrowing Advisory Committee, the International Center for Research on Women, the Peterson Institute for International Economics and the IMF's Committee of Eminent Persons. He is currently a board member of the NBER, the Carnegie Endowment for International Peace, and Cambridge in America. He chairs the Microsoft Investment Advisory Board. He holds a master's degree and doctorate (economics) from Oxford and received his bachelor and master degrees from Cambridge. He is an Honorary Fellow of Queens' College, Cambridge University.

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