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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.

“Everybody now acknowledges that our baseline is stagflation, and our balance of risk is tilted more towards recession than it is towards high growth and low inflation,” he said.

For companies, the toxic economic situation means we are likely to see falling profit forecasts and earnings expectations ahead. That means it’s time for stock market investors to take some risk off the table, El-Erian argued.

El-Erian has been warning about the threat of stagflation for months now, arguing in May that the Fed won’t be able to avoid the disastrous recipe of persistent inflation and slowing economic growth. And this week he got some backup from the president of the World Bank, David Malpass.

In the World Bank’s latest global economic forecast released on Tuesday, Malpass said it will be hard for many countries to avoid an outright recession over the next year, and stagflation is now the most likely economic outcome for the global economy.

“Several years of above-average inflation and below-average growth are now likely, with potentially destabilizing consequences for low- and middle-income economies. It’s a phenomenon—stagflation—that the world has not seen since the 1970s,” he said.

This story was originally featured on Fortune.com
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