The company’s chief economist expects a more hawkish Federal Reserve to trigger a 10-20% pullback.
And, unlike steep declines in recent years, Zandi predicts that a rapid recovery will not be in the cards, especially because the market is richly valued. He estimates that it could take a year to return to balance.
“Headwinds are strengthening for the equity market,” Zandi told CNBC’s “Trading Nation” on Friday. “The Federal Reserve needs to shift gears here because the economy is so strong. “
He suggests that the correction may already be underway because investors are starting to fear.
The Dow has just experienced its biggest weekly loss since October 2020, falling 3.45%. The S&P 500 at large had its worst week since late February. The tech-rich Nasdaq also had a losing week, but is only 1.28% off its all-time high.
Despite his warning to the market, Zandi believes the economy will avoid a recession, as the downturn is more a matter of overstretching risky asset prices than a serious fundamental issue.
“The economy is going to explode,” he said. “Unemployment is going to be low. Wage growth will be strong. “
Zandi has been sounding the alarm bells on inflation for months.
On “Trading Nation” in early March, Zandi said inflation was “ahead” and investors did not fully understand the risks. According to Zandi, this is still an issue that affects stock and bond investors. Zandi sees little chance that the benchmark 10-year Treasury yield will continue to decline.
“I wouldn’t count on rates that stay at 1.5% for very long given what’s going on,” he added.
Stocks and bonds aren’t the only risky assets that grab his attention. Zandi is also seeing more problems occurring in the sales of commodities and cryptocurrency. In addition, he is concerned about the sustainability of a strong housing market in a context of higher mortgage rates.
“Inflation is going to be higher than it was before the pandemic,” Zandi said. “The Fed has struggled for at least a quarter of a century to drive up inflation, and I think it can. “