Investors haven’t fully grasped inflation is ‘dead ahead,’ economist Mark Zandi warns

Investors may want to hold on even tighter.

Moody’s Analytics Mark Zandi believes Wall Street is significantly underestimating the seriousness of an inflation comeback, and he warns it will affect every corner of the market — from big tech to cyclical trades.

“Inflationary pressures will develop very quickly,” the firm’s chief economist told CNBC’s “Trading Nation” on Friday. “I don’t think there’s any shelter here.”

Yet, recent inflation jitters on the Street got a reprieve on Friday with the major indexes ending the week on a positive note. The bullish activity came as Treasury yields eased.

The S&P 500 is now just 3% from its record high while the tech-heavy Nasdaq gained 1.55% for its first positive day in four.

Zandi contends the market is too sanguine about rising interest rates. He sees inflation “dead ahead.”

So far this year, the benchmark 10-year Treasury Note yield has soared 72%. On Friday, it hit a 2021 high of 1.62%, and then receded due to some sluggishness in the February employment report.

But Zandi predicts the labor market will heat up this year and reflect a booming economy.

We’ve got the pandemic winding down, a boatload of fiscal support coming and we’ve got a lot of folks who have pent up demand and a lot of savings that they’re going to unleash,” Zandi noted. “Growth is going to be very, very strong – lots of jobs, falling unemployment [and] wage growth.”

As a consequence, he warns investors will have to get accustomed to wild market swings that last longer than two weeks. According to Zandi, not even stocks tied to the economic recovery will offer investors a safe haven.

“These are broad, macroeconomic forces that are going to affect all parts of the market equally,” said Zandi.

His forecast calls for a sideways market for one to three years with bursts of volatility due to frothiness amid rising rates.

“Most importantly valuations are very, very high by any historical standards,” said Zandi.

The bottom line: A three year time horizon may not be a long enough for investors in this environment.

“You should be thinking out the next five or ten years,” Zandi said. “For investors who are more near-term focused, I think it’s just going to be a very difficult market to navigate in, and I don’t know that there’s one part of the market that is going to do meaningfully better than the other.”

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