Investors should brace for 'unsettling volatility' and the S&P 500 is headed back to June lows as dysfunction is growing across markets, Mohamed El-Erian says

Jennifer Sor

September 23, 2022 5:42 PM

Markets need to brace for "unsettling volatility," Mohamed El-Erian told CNBC on Friday.

Mohamed El-Erian.

The top economist predicted the S&P 500 could retest June lows due to signs of dysfunction in US Treasuries and money markets.He warned investors not to ignore the gloomy macro backdrop, despite some attractive stock names.

Investors need to brace themselves for "unsettling volatility," and the S&P 500 could head back to June lows, top economist Mohamed El-Erian said, warning of upcoming turbulence to stocks.

"I think there's value under some very attractive single [stock] names. But you just can't avoid the macro factor right now," he said in an interview on CNBC on Friday, predicting that the S&P 500 was set to retest lows near 3,600. By midday, the index hit 3,674.

The S&P 500 already made a start downwards since the Fed delivered another 75-basis-point rate hike on Wednesday, when stocks notched their steepest one-day decline since the pandemic.

El-Erian, who is the chief economic advisor at Allianz, warned of"an accelerated loss in confidence in policy making," adding that policy has gone from "a repressor of volatility to an amplifier of volatility."

He also noted that $50 billion has flowed into cash money markets in the last week, meaning that investors are fleeing equities, high-grade funds, bonds, and other risk assets.

And dysfunction in US bonds, which has seen lower liquidity lately, is worrisome as well, El-Erian added, since the Treasury market can't be isolated from other markets due to its wide impact.

"They can create very unsettling volatility, not just volatility," he said, noting that turmoil in Treasurys is structural and has largely been exposed to the Fed's quantitative easing, which doubled its balance sheet to $8.9 trillion.

El-Erian has been a loud critic of the Fed's expansive policies and their slow reaction to rising inflation, which he says has caused rate hikes to be more aggressive than otherwise would have been necessary. Previously, he said a hard-landing was "uncomfortably possible."

Jennifer Sor