El-Erian: Why the stock market had such strong week

·3 min read
Mohamed El-Erian, Chief Economic Advisor of Allianz. REUTERS/Lucy Nicholson
Mohamed El-Erian, Chief Economic Advisor of Allianz. REUTERS/Lucy Nicholson

The NASDAQ recorded its best week of the year despite what most observers would deem as worrisome geo-political developments, a less-than-stellar US jobs report, and a devastating hurricane that, in addition to tragically claiming many victims, wiped out significant physical wealth. Understanding this dichotomy speaks to the strength of the forces that have already delivered handsome rewards to financial risk takers, including through investments in stocks around the world.

Early in the week, North Korea fired a missile over Japan and declared that this constituted a prelude for a possible nuclear attack on the US territory of Guam. In responding to such brazen provocation, the US reminded North Korea that all options remained open. Meanwhile, a devastating hurricane pummeled parts of Texas and Louisiana, causing widespread human suffering and considerable physical damage, a good part of which is said to be uninsured. Finally, the week ended on an uncertain economic note with August job creation falling short of expectation, the unemployment rate edging up, and wage growth remaining muted.

Yet, in all this, the NASDAQ rose almost 3%, its best weekly gain for 2017.

The surge higher in the NASDAQ was powered by an 8% gain in its biotech sector as two specific factors contributed to decoupling it from the week’s more uncertain economic and geo-political context: renewed corporate M&A activity and promising technological innovation (namely, FDA approval of a revolutionary gene therapy).

These two amplified the more general drivers of stock market performance which helped the broader S&P rise almost 1 ½% for the week.

This week saw further indications of a pickup in global growth, including favorable data out of Asia and Europe. Also, investors and traders grew even more confident that central bank policies would remain highly supportive of financial assets. In particular, they rightly brushed off the notion of meaningful negative implications for the economy of the disappointing jobs report, deciding instead to see it as increasing the probability of Federal Reserve policy remaining looser for longer. Adding to this feeling of comfort, the European Central Bank signaled on Friday that it was considering delaying the timetable for its own (already-lagging) balance sheet normalization.

With such forces in play for a while now, investors and traders have been conditioned to buy the dip, and virtually any dip. Indeed, and notwithstanding the extent to which elevated asset prices have already decoupled from more sluggish fundamentals, it still would take a major and sustained negative shock to result in what many professionals would view as an overdue market correction.

With sizeable rebuilding expected in the aftermath of the hurricane, and with the markets believing that North Korea’s action and words will not lead to nuclear confrontation, this week did not offer that. So, the earlier dip turned out to be – at least for now – yet another profitable buying opportunity.

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). A Bloomberg columnist and Financial Times contributing editor, he was Chair of President Obama’s Global Development Council and has authored two New York Times Best Sellers: the 2008 “When Markets Collide” and 2016 “The Only Game in Town.”