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El-Erian: Traders should be 'a little bit tactical' after market's 'temper tantrum'

Big swings in the stock market will continue as investors react to Federal Reserve decisions and public statements, predicted Allianz’s chief economic adviser, Mohamed El-Erian.

“This is a market that’s really impacted by what the Fed says,” El-Erian said. “We've been up 20% and we could be down 20% in three to six months time.”

Fed decisions to raise the benchmark interest rate, as it did last December, have sent stocks tumbling. In contrast, when Fed Chairman Jerome Powell said the central bank intends to be “patient” with monetary policy on January 4, the market soared.

In light of the volatility, El-Erian advised stock traders to “be a little bit tactical in addition to being long term.”

El-Erian made the comments to Editor-in-Chief Andy Serwer in a conversation that aired on Yahoo Finance in an episode of “Influencers with Andy Serwer,” a weekly interview series with leaders in business, politics, and entertainment.

During his tenure as CEO, El-Erian helped PIMCO grow its assets under management to as high as $2 trillion. At the same time, he led a team of advisers that instructed President Barack Obama on global development. Before that, he took charge of the billions in Harvard University’s endowment and worked as deputy director at the International Monetary Fund.

Since 2014, El-Erian has served as the chief economic adviser at Allianz, the parent company of PIMCO.

Central banks and investors can’t be ‘best friends forever’

Now in its 10th year, the current economic expansion is the second-longest in U.S. history. Fed efforts to normalize the benchmark interest rate, however, have prompted dramatic sell-offs. When the Fed raised the rate a quarter percentage point on December 19, and failed to calm markets in public statements, the Dow fell 352 points, or 1.5%, and closed at its lowest level of 2018 up to that point.

Less than three weeks later, on January 4, Powell said the Fed would take a flexible approach to rate hikes, on the same day as a blockbuster jobs report. The Dow ended the day up 746 points, or 3.3%.

“The market had a bit of a temper tantrum in the last quarter,” El-Erian said. “And guess what? The Fed changed course completely.”

If Federal Reserve bankers spoke candidly, El-Erian said, they would say “‘we don't like the extent to which markets have held us hostage.”

El-Erian said acute investor sensitivity to Fed policy stems from the years of low interest rates that followed the Great Recession.

“It pushed everybody to take more risk,” he said. “And secondly, it changed our mindset. We believed that central banks were our BFFs, our best friends forever.”

“But at some point, they can't be our BFFs,” Serwer said.

“Correct,” El-Erian replied.

Andy Serwer is editor-in-chief of Yahoo Finance.

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