Moody’s Analytics Mark Zandi has a message for investors: brace for a significant market correction.
The firm’s chief economist expects the more aggressive Federal Reserve to spark a 10% to 20% pullback.
And, unlike the sharp declines over the past several years, Xandi anticipates that a quick recovery will not be in the cards, especially because the market is quite valuable. He estimates it may take a year to return to breakeven.
“Headwinds are forming for the equity markets,” Zandi told CNBC’s “Trading Nation” on Friday. “The Federal Reserve’s got to change gears here because the economy is so strong.”
He suggests that a correction is already underway as investors are starting to panic.
The Dow saw its biggest weekly loss since October 2020, falling 3.45%. The broader S&P 500 saw its worst week since late February. The tech-heavy Nasdaq also had a declining week, but is down just 1.28% from its all-time high.
Despite its market warnings, Zandi believes the economy will avert a recession because the recession is more about risk-averse asset prices than a serious fundamental issue.
“The economy is about to tear up,” he said. “Unemployment is going to go down. Wage growth is going to be strong.”
Zandi has been sounding the alarm on inflation for months.
On “Trading Nation” in early March, Zandi said inflation was “dead ahead” and that investors were not fully understanding the risks. According to Zandi, this is still a problem affecting the stock market and bond investors. Zandi sees little chance that the benchmark 10-year Treasury note yield will continue to fall.
“Given what’s going on, I wouldn’t count on rates staying at 1.5%,” he said.
Stocks and bonds aren’t the only risky assets to attract their attention. Xandi has further trouble with commodity and cryptocurrency sell-offs. In addition, he is concerned about the stability of a strong housing market amid high mortgage rates.
“Inflation is going to be higher than it was pre-pandemic,” Zandi said. “The Fed has been fighting for at least a quarter century to keep inflation up, and I think they’ll be able to achieve that.”