Moody’s Analytics Mark Zandi gives a message for investors to brace for a significant market correction.
The firm’s chief economist anticipates that a more hawkish Fed Reserve will spark a 10% to 20% pullback. He warns investors to be aware of inflation headwinds.
And, unlike the sharp drops over the past few years, Zandi expects that a quick recovery won’t be in the cards especially because the market is richly valued. In his estimation, it could take a year to return to break even after 10% to 20% market correction.
Zandi told, “The headwinds are building for the equity market. The Federal Reserve has got to switch gears here because the economy is so strong.”
He suggests the correction may be already underway because investors are starting to get spooked.
The Dow just witnessed its biggest weekly loss since time of October 2020, tumbling 3.45%. The broader S&P 500 witnessed its worst week since late February. The tech-heavy Nasdaq also experienced a losing week, but it is just 1.28% off its all-time high.
Despite his market warning, Zandi believes that the economy will avert a recession. He said, “The economy is going to be rip-roaring. Unemployment is going to be low. Wage growth is going to be strong.”
Zandi has been ringing the alarm on inflation for past several months. In early March, Zandi stated inflation was dead ahead and said that investors weren’t fully grasping the risks. According to him, it’s still a problem affecting bond investors and stock market. Zandi sees very little chance that the benchmark 10-year Treasury Note yield will keep falling.
“I wouldn’t count on rates staying at 1.5% for very long given what’s going on,” he added.
Stocks and bonds are not the only risk assets catching Zandi’s attention. He also sees more trouble brewing in the sell-offs of commodities and cryptocurrency. He is also worried about the sustainability of a strong housing market amidst higher mortgage rates.
Zandi said, “Inflation is going to be higher than it was pre-pandemic. The Fed has been struggling for at least a quarter of a century to get inflation up, and I think they’ll be able to get that.”