Tags: El-Erian | investors | volatility | stock

El-Erian: 'Investors Should Expect a Lot More Volatility'

By    |   Monday, 06 April 2015 06:20 AM

The CBOE Volatility Index has soared 14 percent since the S&P 500 index hit a record high March 2, and the trend is likely to continue, says Mohamed El-Erian, chief economic advisor at Allianz.

The divergence of global central bank policy will contribute to that volatility, he tells CNBC. The Fed is preparing to raise interest rates later this year, while the European Central Bank is buying 60 billion euros of bonds per month to boost the eurozone's stagnant economy.

"Investors should expect a lot more volatility, and they should expect more of what they saw in the first quarter, which is the beta [volatility] trade in U.S. equities is not going to be as satisfying as it has been in the past."

El-Erian's comments came before Friday's jobs data, which showed that payrolls rose only 126,000 in March, the lowest reading since December 2013.

That report will likely add volatility to financial markets, as it increases the uncertainty of when the Fed will lift rates. The stock market is closed for Good Friday.

So what should investors do in this environment?

El-Erian suggests looking for specific companies rather than buying the broad index. He recommends buying companies that "are going to be involved in some corporate action. There's lots of cash on the sideline."

In addition, investors should invest in companies that "are getting a lot of traction from growth."

They should also consider allocating money to Europe, because it will "benefit from the QE [quantitative easing] trade," El-Erian notes, adding to be cautious of currency exposure because he expects the dollar to get stronger.

Joseph Calhoun, CEO of Alhambra Investment Partners, also sees increased volatility.

"Volatility in and of itself isn’t necessarily a bad thing, as markets can continue to climb even as volatility does the same," he writes in a market commentary. Indeed, the S&P 500 stands less than 3 percent from its record high.

"But it does make one a bit nervous to recognize that the last time it happened we were in the middle of a stock market mania," Calhoun explains.

And what of the future? "With an economic slowdown getting more obvious with every — or maybe every other — economic report and the continued rapid movement of the dollar and other currencies, the volatility in stocks and bonds seems likely to continue," he says.

As for reports of economic weakness, in addition to the sluggish employment gains, retail sales fell 0.6 percent in February, the third straight month of decline. The dollar has soared to multi-year highs against multiple currencies in recent weeks.

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The CBOE Volatility Index has soared 14 percent since the S&P 500 index hit a record high March 2, and the trend is likely to continue, says Mohamed El-Erian, chief economic advisor at Allianz.
El-Erian, investors, volatility, stock
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2015-20-06
Monday, 06 April 2015 06:20 AM
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