Economist Mohamed El-Erian is urging investors to proceed with caution before buying into any coronavirus dip.
“I stress, this is different,” said El- Erian. “I would continue to resist, as hard as it is, to simply buy the dip.”
This strategy especially applies to long-term investors. “If you are a long-term investor, I would wait.”
“I think fundamentals are going to deteriorate even faster. I think the policies and fundamentals are going to go in favor of bad fundamentals, unfortunately, initially,” said El- Erian.
Nevertheless, he says, “if you’re a short-term tactical investor, there’s a lot of opportunities out there.”
El- Erian recently correctly predicted that the Fed would cut rates, which it did on March 3rd. The surprise rate cut by the Fed was a 50 basis point reduction.
That was followed up with a massive cut to zero on the benchmark federal funds rate and a restart of open-ended quantitative easing (QE), similar to the 2008 crisis.
One industry expected to face negative consequences due to the coronavirus is the U.S. oil industry.
The Dallas Federal Reserve forecasts that the oil industry will cut capital spending by 10% to 15% in 2020.
Rob Kaplan, president of the Dallas Fed, believes that the coronavirus will seriously halt demand for oil.
China, where this coronavirus originated, accounted for about 14% of total global oil consumption and about 57% of consumption growth in 2019.
“In the U.S., more broadly, lower oil prices should benefit U.S. consumers by freeing up more of their disposable income for the consumption of non-oil goods and services,” Kaplan wrote.
However, after the last decade’s switch from the United States as an oil importer to an oil exporter, the coronavirus pandemic is a blow to U.S. energy producers and thus is more likely to hurt the economy on balance.
“Changes in oil prices will increasingly redistribute income between sectors and states within the U.S., as opposed to impacting the transfer of income between the U.S. and other oil-exporting nations,” Kaplan wrote.
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