Mohamed El-Erian: Here's why the markets came back up

El-Erian: Here's why markets bounced back
El-Erian: Here's why markets bounced back

President-elect Donald Trump can do three things to stabilize the stock market and prevent further downside, closely followed economist Mohamed El-Erian told CNBC on Wednesday.

"It's important that Mr. Trump came out in a very gracious manner, and that's why the markets came back from being 'limit-down 5 percent' to something much less worrisome," the chief economic adviser at Allianz said on "Squawk Box."

After plunging as much as 800 points Tuesday night, the Dow opened lower Wednesday, turned higher and then fell. Tuesday night's swoon was just above levels identified as "limit down" by the CME.

Mohamed El-Erian
Scott Mlyn | CNBC

"For those who have chosen not to support me in the past, of which there were a few people, I'm reaching out to you for your guidance and your help, so that we can work together and unify our great country," Trump said in a victory speech.

El-Erian, chairman of President Barack Obama's Global Development Council, said the markets will react favorably to a plan from Trump that focuses on his pledges for on tax reform, infrastructure investments and deregulation. But he said financial markets will not respond well to a plan that is heavy-handed on trade protectionism. He said Trump should play down his platform on renegotiating trade agreements and imposing tariffs on China.

He also said Trump must continue the gracious tone of his victory speech.

"He's got to come across as he did at 2:30 this morning: as a unifier, now that the election is behind us," El-Erian said.

— CNBC's Patti Domm contributed to this report.