Mohamed El-Erian: “the market will continue to buy the dips”

At the peak of the Coronavirus in March 2020, the financial market started to plunge sharply. Similar were the expectations in recent days as the delta variant continued to spread its wings across the United States. What confused many investors, however, was that the market wobbled last week but then recovered right back.

El-Erian’s remarks on CNBC’s “Squawk Box”

On CNBC’s “Squawk Box” this morning, Allianz and Gramercy advisor Mohamed El-Erian said the market didn’t bother about the growth concerns, fears of inflation, and Fed tapering because it is “deeply conditioned to buy the dips”.  

Are you looking for fast-news, hot-tips and market analysis?

Sign-up for the Invezz newsletter, today.

“The market conditioning is strong to buy on dips, and the market will continue to buy the dips. You need a major shock to this marketplace to shake out this behavioural conditioning.”

The delta variant made Goldman Sachs cut its forecast for U.S. GDP last week to 5.5% from 9.0%, but El-Erian said the market is still deeply convinced that the Fed is incredibly dovish.

“The marketplace is convinced that the Fed is not going to taper in November or October. It’s convinced that when push comes to shove, they’ll wait, because COVID is slowing down growth,” he added.

El-Erian’s outlook on a prospect of a 5.0% correction

El-Erian fixated on how the market will continue to buy the dips, and a turnaround to see a 5.0% correction is not in the near future.

“For a 5.0% correction, you need a major policy mistake, the Fed being really late in easing its foot off the accelerator, or alternatively, you need a market accident. Right now, neither are being factored in by the marketplace,” he said

He, for one, however, is convinced that the U.S. is indeed in a major policy mistake because inflation is not going to be transitory. But it will take until “the end of the year for us to find out,” he added.