- Despite painful losses, Mohamed El-Erian thinks there are three positive effects of the ongoing bear market.
- His views come as the S&P 500 comes off its worst first haf of the year since 1970.
- "The promise now is one of a more sustainable destination," El-Erian said.
Stocks plunged into bear market this year and everything else from bonds to cryptocurrency has been battered, but investors should take note of three positive outcomes that will come as a result of 2022's brutal decline in asset prices, according to Allianz chief economic advisor Mohamed El-Erian said.
His comments come as inflation continues to run hot and as the the S&P 500 emerges from its worst first half of the year since 1970. Meanwhile bonds have suffered and crypto prices have been crushed, making for a market devoid of safe havens for weary investors.
But, despite deep losses across markets, El-Erian says there are three silver linings that investors should take note of.
First, stocks that are beginning to recover from bearish conditions are gaining "more sustainable value," El-Erian said in an op-ed published by Bloomberg Tuesday. It's an improvement from what the economist says were artificial highs seen in many assets, driven by massive liquidity injections from the Federal Reserve meant to keep the economy afloat during the pandemic.
The Fed-induced bubble caused "silly things where there is investing in parts of the market we shouldn't be investing in," El-Erian said to Fortune last month.
The sell-off means that assets that were previously inflated are now oversold, and are on track to return to their true value, El-Erian said.
Second, government bonds have recovered as investors take shelter from bearish conditions. The 10-year Treasury yield is back down under 3%, to 2.79%, and the 30-year Treasury has dropped to 3.02% as of 12:50 p.m. ET.
"This is better news for investors, who, for the most of the first half of this year, felt that there was nowhere to hide," El-Erian said.
And the third benefit of the market swoon, El-Erian added, is that the rebound in bonds reestablished an inverse relationship between fixed income and equities, as that relationship had been disrupted during the sell-off, with both markets plummeting in tandem.
El-Erian said that the economy was previously threatened with "interest rate risk" due to high inflation, as well as a "credit risk" due to growing recession fears. The recovery in the bond market staunches some of the interest rate risk, which prevents serious impairment to the market overall.
In other words, the top economist thinks things could be worse.
"The promise now is one of a more sustainable destination. Unfortunately, it comes with an uncomfortably bumpy and unsettling journey," El-Erian said of the economy.