Investors respect the power.

Why This Market Rally Is So Unloved

Mohamed A. El-Erian is a Bloomberg View columnist. He is the chief economic adviser at Allianz SE and chairman of the President’s Global Development Council, and he was chief executive and co-chief investment officer of Pimco. His books include “The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse.”
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Last week, with summer coming to an end, I asked readers of this column to offer their views on the state of financial markets. The responses I've received in the comment section, by e-mail and on Twitter shed light on why the recent impressive asset-price rallies remain so unloved and are constantly questioned.

Many comments focused on the role of the U.S. Federal Reserve, particularly in pushing asset prices above the level that the underlying economy would justify -- a process described by readers as changing "the laws of physics," spinning "straw into gold" and sprinkling "fairy dust." As one reader put it, central banks are the "800-lb gorilla in the room and it looks like they are not in a hurry to leave." The result is that investors are conditioned to expect continued central bank support -- "every dip is a buying opportunity," according to one comment.

The readers' respect for the influence of central banks -- including the adage of never fighting the Fed, especially when it is in stimulus mode -- is far from being unconditional or anxiety-free. Some worried that investors are being lulled into "a state of complacency," that markets are being driven "into a manic phase," with relationships between asset classes becoming "unpredictable" and market volatility excessively repressed. Nobody was particularly concerned, though, about inflation and wage pressure.

Overall, I got the sense that most readers are worried about a market turn at some point, mainly because there is little faith in a robust and durable economic rebound anytime soon. One warned that extremely low yields on government bonds are signaling "a Japanese decade" of stagnation, while another noted the need to adjust to "lower trend growth rates."

That said, readers don't expect investors to reposition anytime soon for the possibility of market downturns. Instead, they seem confident that central banks will keep supporting asset prices, limiting any and all corrections and thus making them "shallow." After all, we are still "a world awash with money looking for a home," according to one reader.

If the comments are representative of the market consensus, I see three major implications:

  1. It takes a lot to dislodge investors' faith in the ability of central banks to maintain and fuel market rallies.
  2. When and if this faith is dislodged, the correction could be quite pronounced and broad-based.
  3. In the meantime, investors are happy to ride the central banks' liquidity wave, albeit nervously.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Mohamed Aly El-Erian at

To contact the editor on this story:
Mark Whitehouse at