By Mohamed El-Erian, chief economic advisor to Allianz
By extending daily losses to nine straight days on Friday, the S&P index experienced its worse losing streak for 36 years. Yet, in terms of the cumulative loss experienced by investors, this is still one of the mildest multi-day selloffs. Indeed, Friday’s loss was just 0.17%. So rather than just be captivated by attention grapping headlines, here are four things that investors may wish to know:
1. This is not the major stock market “correction” that quite a few professionals have been concerned about. As yet, there have been no signs of “capitulation” trades, nor have there been indications of particular positioning stress and instances of liquidity dislocations. Instead, it has been a remarkably orderly and gradual repricing of risk on account of higher political uncertainty for markets that had positioned itself early for a high probability Hillary Clinton victory next week.
2. The rise in political uncertainty is but one of the many “unusual uncertainties” facing the markets (and the economy more generally). And these are not just political. They also relate to economics (including the puzzle of low productivity), financial developments (such as the impact of ultra-low and negative interest rates), and institutional factors (including increased political attacks on central banks in Europe, Japan and the United States).
3. While not big, the recent equity selloff has added to the (correct) sense that it is very hard for investors to secure high returns just from exposure to general market indices. As demonstrated again this year, it is a challenging environment for diversified, index-based buy and hold strategies. Good individual name selection and timely tactical repositioning have been – and will remain – much more important drivers of total return.
4. What happens next to markets will remain sensitive to political developments, including the outcome of Tuesday’s US election and next month’s Italian referendum. And this phenomenon is by no means limited to 2016. Political risk will remain in play next year with a series of important elections in Europe. And all this in an environment in which, due to prolonged central bank activism, markets have been decoupled from underlying economic and corporate fundamentals.
Mohamed A. El-Erian is the chief economic advisor to Allianz, the corporate parent of PIMCO where he served as CEO and co-CIO (2007-2014). He is Chair of President Obama’s Global Development Council and the author of two New York Times Best Sellers: the 2008 “When Markets Collide” and this year’s “The Only Game in Town.”