- Markets are overly optimistic about the economy next year, Mohamed El-Erian said in a CNBC interview.
- Meanwhile, November's rally was driven by Goldilocks data, lower yields, and lower oil prices.
Markets this month have been cheering the prospect of dodging a major recession and a less hawkish Federal Reserve, but they may be cheering a little too much, Mohamed El-Erian said.
According to the top economist, markets are overly optimistic about the economy next year. Heading into 2023 last year, markets were pessimistic about the economy, and for the most part, they've been proven wrong.
"That upside surprise let people be overly optimistic about next year," El-Erian said in a CNBC interview on Tuesday. "I'm not saying the baseline is going to be a massive financial accident but consensus forecasts are too optimistic about the global economy."
Meanwhile, he also sounded cautious about the stock market, which has seen sharp gains just in the month of November alone.
The rally has largely been driven by a "unique alignment" of four things: Goldilocks data for the economy, declining oil prices, lower yields, and lots of cash to invest in the markets.
"If you look at that alignment and see how it will continue, three of those factors are facing headwinds," El-Erian said. "One, the Goldilocks data is unlikely to persist. Two, the yields are going to face significant debt auctions, where the buyers are in question at these levels. And thirdly, I don't think OPEC is going to stay quiet to see oil prices where they are now."
While markets have been gliding on cooling economic data like the latest benign inflation report, that may not be the case going forward.
Also, while Treasurys snapped their downward slide this month, bringing yields lower, some recent bond auctions have seen lackluster demand, raising the possibility that returns will have to go up to draw more buyers.
And finally, falling oil prices may not sit well with OPEC+ countries, like Saudi Arabia and Russia, who have been slashing production to prop up oil prices. West Texas Intermediate crude has fallen to around $75 a barrel from highs of nearly $94 in September. The two oil giants have already announced they will stick to their production cuts till the end of this year.
Those three changes pose challenges to the market's current momentum.
"I'm not talking about major sell-offs, to be clear," El-Erian said. "I'm just talking about consolidating at these levels until we get clarity on the things I've mentioned. But there's still a lot of money to be put to work. That's the real positive here."
He added later, "We're talking about not repeating what has been an exceptional November."