Financial markets may be entering a dangerous phase, according to Moody’s Analytics chief economist Mark Zandi.
In a new post on X, Zandi says conditions are aligning for what he predicts will be a significant sell-off across asset classes.
According to the economist, the market looks frothy amid sky-high investor optimism.
“Financial markets feel increasingly fraught to me, with the elements for a meaningful sell-off coming into place. This threat is highest for stocks and corporate bonds, but even crypto, gold, and silver remain at risk despite recent pullbacks.
Valuations are high. There are good fundamental reasons for this, but markets appear increasingly tainted by speculation. That is, investors are simply investing on the faith that prices will rise quickly in the future because they have in the recent past.”
Looking at economic fundamentals, Zandi says the data do not justify aggressive risk-taking, while citing geopolitical threats.
“On the fundamentals, the economy’s performance is mixed. Real GDP is the strongest indicator, and it is growing just over 2%, below the economy’s potential, estimated to be near 2.5%. Employment has flat-lined, and unemployment continues to creep higher. Inflation, as measured by the Fed’s preferred consumer expenditure deflator, remains stubbornly and uncomfortably high at 3%.
And there is no economic upside to the renewed chaos over tariffs and a looming military conflict with Iran.”
He also says the Treasury market looks fragile.
“As the price-insensitive Federal Reserve and global investors have stepped away from the market, uber price-sensitive hedge funds playing a leveraged basis trade have stepped in. It’s not hard to imagine them running for the proverbial door all at once, and interest rates spike.”
Zandi says the trigger for a meaningful market sell-off could come from persistent federal deficits and heavy funding needs, combined with foreign investors questioning Treasuries’ safe-haven status in a de-globalizing world.
“Markets risk moving in a big way. Causality is reversed, and falling asset prices threaten an already vulnerable economy. This is one of those times.”
Earlier this month, Goldman Sachs CEO David Solomon warned that the US could witness economic shocks if the government continues to run massive budget deficits.
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