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El-Erian: 'The market will ignore what's going on in DC'

Even as geopolitical concerns and President Donald Trump’s impeachment inquiry dominate the public consciousness, market participants will wear their blinders, according to Mohamed El-Erian.

“Let me tell you what the market will do. The market will ignore what’s going on in D.C.,” El-Erian, chief economic adviser at Allianz, said during Yahoo Finance’s On the Move on Thursday.

“Just as it has ignored the impeachment process, just as it has ignored the Mueller report – the market is basically saying as long as central banks are supportive, that’s what matters, and setting aside all these other things,” he said.

This phenomenon – with stocks surging to new highs even amid optically negative headlines about U.S.-Iran tensions and other political discord – speaks to the “disconnect” El-Erian sees between investors and pundits in other spheres.

“The disconnect is not just between economists and market participants,” El-Erian said. “It’s between economists on the one side and on the other hand, you have market participants, political science and international relations experts. They are much more cautious about what’s going on.”

PIMCO's Chief Executive Officer and Co-Chief Investment Officer Mohamed El-Erian speaks during an interview at Thomson Reuters in New York March 31, 2011. PIMCO would reconsider buying back U.S. government debt, including Treasuries, if the Newport Beach, Calif. firm sees value in them again, El-Erian said on Thursday.                               REUTERS/Shannon Stapleton (UNITED STATES - Tags: BUSINESS)
Mohamed El-Erian. REUTERS/Shannon Stapleton

“But the markets are repeating the same game plan that has worked really well: Bet on liquidity and it will power through all these uncertainties,” he added.

‘If you’re a tactical investor, life is relatively easy’

The Federal Reserve’s pivot to looser monetary policy last year has been the primary pillar of recent financial market strength, according to El-Erian. With this, the Fed delivered three quarter-point interest rate cuts to bolster economic growth and infused more $600 billion in liquidity to financial markets via overnight repurchase agreement operations and large-scale asset purchases.

Markets have come to expect this support will continue, emboldening investors to use any momentary, event-driven market dips as a buying opportunity.

But in the long-run, these expectations could prove dangerous, El-Erian said.

“I keep on cautioning, be careful that you cannot bet on liquidity long-term,” he said. “Yes, the Fed did a dramatic 180 a year ago. Yes, the Fed led other central banks to also follow it in policy loosening. But you can’t repeat it over and over again.”

“And meanwhile the uncertainties are piling up. So if you’re a tactical investor, life is relatively easy. If you are a longer-term secular and structural investor, life is getting much more difficult,” he added. “And the challenge for all of us to navigate this growing tug of war between constructive short-term and to use (Former Fed Chair) Ben Bernanke’s phrase, an ‘unusually uncertain’ medium-term.”

Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck

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