Markets

El-Erian: US stock market could end up dropping 20%-30% before bottom is finally reached

Key Points
  • Economist Mohamed El-Erian said the U.S. stock market may drop 30% from last month's record highs before finding a bottom.
  • "This is going to be treacherous for a while," the chief economic advisor at Allianz said.
  • "I would advise most retail investors to stay on the sidelines, not panic. There will be opportunities but they're not now," he said.
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Allianz's El-Erian advises retail investors to stay on sidelines for now

Economist Mohamed El-Erian said Monday the U.S. stock market may drop 30% from last month's record highs before finding a bottom.

"This is going to be treacherous for a while. I would advise most retail investors to stay on the sidelines, not panic. There will be opportunities but they're not now," the chief economic advisor at Allianz said on CNBC's "Squawk Box" as Dow futures plummeted about 1,300 points, oil prices fell more than 20% and the 10-year Treasury yield briefly dropped below 0.4%.

El-Erian, formerly co-CEO of investment powerhouse Pimco, first warned on Feb. 3 that individual investors should "resist our inclination to buy the dip" as coronavirus concerns were just starting take stocks lower. He has not wavered in that advice since, saying late last month that the outbreak is "different" than regular economic crises. Economic sudden stops are hard to restart," he said at the time and reiterated Monday.

"It's going to be messy because we've basically lost all our anchors," El-Erian said. "We lost the economic anchor with the coronavirus. We've lost the policy anchor with people losing confidence in the Fed's ability to turn things around. And over the weekend, we lost a market anchor with OPEC" failing to get a production-cut deal.

"It means a 20%, 30% drop in prices" from the Dow Jones Industrial Average's Feb. 12 record, he added. The Dow, as of Friday's close, was 12.5% off those all-time highs.

Put that together with what looks like a possible 5% drop at Monday's open, and the Dow could be entering the leading edge of El-Erian's prediction. In measuring the magnitude of the declines, a market correction is defined by a drop of at least 10% from recent 52-week highs. A bear market happens when declines reach at latest 20% from recent 52-week highs.

Shortly after Monday's open on Wall Street, the S&P 500 went down over 7%, triggering the first of "three circuit breaker thresholds." Trading was paused for 15 minutes. When trading resumed, the S&P 500 was down about 6%.