REUTERS/Phil McCarten
But Mohamed El-Erian, chief economic advisor to Allianz and former CEO and Co-CIO at PIMCO, writes that investors should be wary of interpreting economists' predictions.
To make predictions about the things that support stock prices, they'd need to make predictions about "productivity trends and the effectiveness of macroprudential policies," writes El-Erian, in the Financial Times. But this is notoriously hard to do.
"Economists are not well placed to make confident predictions about the risk of greater economic and financial instability," he writes. From El-Erian:
"Productivity trends are hard to measure accurately, let alone predict. The record on assessing financial instability is even worse. It is not just that most economists misjudged the run-up to the 2008 financial crisis; even Fed officials, who arguably are a lot closer to markets, were shocked by last year's severe "taper tantrum". And if all these people cannot get their arms around the underlying fragility of the financial system, it is difficult to be confident about the effectiveness of macroprudential measures.
"All of which is to say that the analytical underpinnings of the current phase of risk taking in financial markets are far from robust. Yes, the Fed's policy approach could succeed in the next few quarters in engineering a handover from financial excesses to economic lift-off, thereby validating high market valuations and pushing them even higher, especially if the world has indeed transitioned to a paradigm of significantly and permanently lower levels of nominal and inflation-adjusted growth.
"But the timing is inherently uncertain. And the probabilities of doing so may not overwhelmingly dominate those of a less pleasant scenario - that of stagflation and greater financial instability. This configuration of more balanced risk is not yet reflected in asset prices and the levels of implied and realized volatility."
Investors beware.