Economist and Gramercy Funds Management chair Mohamed El-Erian believes those that are fully invested in the market may want to rethink their position.  With stagflation approaching, a “recession is likelier than a return to normal.”

 

Yahoo Finance/Fortune/William Daniel
Top economist Mohamed El-Erian says the market rally isn’t a buy signal as stagflation looms. ‘I would take some chips off the table’

U.S. stocks just had one of their worst starts to a year in history, with the S&P 500 falling nearly 19% through mid-May to a low of 3,900.

Over the past few weeks, however, the index has rebounded roughly 6% to 4,150.

Some argue it’s nothing but a bear market rally and recommend investors avoid getting too excited, but others see the recent upswing as a buying opportunity, particularly when it comes to beaten-down tech stocks.

Mohamed El-Erian, chair of Gramercy Funds Management and former chief executive officer of Pimco, argued in an interview with CNBC on Wednesday that investors should be more cautious given the potential economic risks.

“If I were fully invested right now, I would take some chips off the table,” he said. “I would wait for more value to be created.”

El-Erian said he worries that the U.S. economy will face a 1970s-style stagflation scenario moving forward—where inflation remains high while economic growth stalls.

The economist, who also serves as the president of Cambridge’s Queens’ College, made the case that rising consumer prices will remain a thorn in the side of the Federal Reserve, despite the central bank’s interest rate hikes.

On June 10, the markets will digest May’s consumer price index (CPI) data, and El-Erian said he fears evidence of falling inflation won’t show up just yet.

“I think the expectation is that core [inflation] is going to come down, but headline [inflation] will stay at 8.3%,” El-Erian said. “And if you asked me where is the balance of risk, I think the balance of risk is that we print a higher number on the headline side rather than a lower number.”

What does that mean for the economy? El-Erian argues that the implications are “crystal clear”—stagflation is on its way, and a recession is likelier than a return to normal.

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CNN Business/Paul R. La Monica
Wall Street’s blank-check boom has gone bust

The once hot blank-check merger trend is fading fast.

The stock market has been cratering so far this year — leaving special purpose acquisition companies, which buy private firms in order to take them public without the need for a traditional initial public offering, with difficulty finding targets.

SPACs, also known as blank check companies, are facing the same concerns about inflation and a looming recession on the horizon that are plaguing the rest of Wall Street.

So with stocks tumbling, the IPO market drying up and increased regulation around the corner, several high-profile SPACs have recently pulled the plug on their merger plans.

Activist-investing king Bill Ackman’s Pershing Square Tontine Holdings SPAC still hasn’t found a company to buy after a deal to acquire a 10% stake in Universal Music Group fell apart shortly following its announcement last year.

RedBall Acquisition Corp., the SPAC run by Billy Beane — the baseball executive played by Brad Pitt in “Moneyball” — said this month it’s terminating its agreement to buy ticketing app SeatGeek, citing “current unfavorable market conditions.” In media, Forbes is also no longer planning to go public via a SPAC, ending its merger talks with Magnum Opus Acquisition Limited. 

Expect more firms that hoped to go public through this once-trendy fad to put the kibosh on those plans. Several other startups have already scrapped their SPAC plans for this year, including homebuying service Knock, corporate ridesharing firm Gett and investing app Acorns.

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CNBC/Elliot Smith
Treasury yields climb as investors assess growth and inflation fears

U.S. Treasury yields climbed on Wednesday as investors await a key inflation indicator and assess signs of slowing economic growth.

The yield on the benchmark 10-year Treasury note increased by roughly 6 basis points to 3.033%, while the yield on the 30-year Treasury bond also rose about 6 basis points to 3.182%. Yields move inversely to prices, and a basis point is equal to 0.01%.

The rise for U.S. Treasury yields mirrored similar moves in Europe, where the European Central Bank is following the Federal Reserve in tightening monetary policy.

“While the ECB is worried about the collateral damage to the markets due to the end of QE and rate hikes likely starting in July, they need to understand that the more they do right now, the more it might actually contain the rise in longer term yields,” Peter Boockvar, chief investment officer of Bleakley Advisory Group, said in a note to clients.

Auctions were held on Wednesday for four-month and 10-year Treasurys. Yields moved higher following the 10-year auction.

On the economic front, mortgage applications fell to their lowest level in more than two decades as rising interest rates appear to be spooking potential buyers.

Meanwhile, a widely tracked Fed gauge is indicating that the U.S. economy could be on course for a second successive quarter of contraction. The Atlanta Fed’s GDPNow tracker is pointing to an annualized gain in gross domestic product of just 0.9% for the quarter.

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